MoneyWeek Talks: Investing in Asia’s engine of growth

Asian small companies are often overlooked – but they shouldn’t be, Gabriel Sacks, manager of the Aberdeen Asia Focus fund says.

Speaking to Cris Sholto Heaton on the MoneyWeek Talks podcast which is now available on all podcast platforms and our YouTube channel, Sacks says Asia is the largest economic region in the world, and it acts as the engine of growth for the global economy.

“Asia is delivering over 50% of global growth. So a lot of people will look at Asia small caps as being niche but actually in my view it should be really core to people’s portfolios because you get away from some of the mega caps and get access to really the engine of domestic and global growth.”

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With the region being so large both geographically and economically, there are many opportunities for investors to find real returns.

Sacks says his fund is able to get broad access to Asian markets and look at the opportunities presented by all the different countries in the region and the thousands of listed firms.

That being said, there is a need to narrow it down to just the most exciting ones, but the low amount of research available presents a challenge. Sacks says that this is partially caused by the fact that the Asian small caps market changes very rapidly and the research struggles to keep up.

“One of the differences I think with Asia and emerging markets is that the universe is changing very quickly. It’s a very dynamic region. If you look at places like Latin America or EMEA there’s a narrower set of opportunities and you can buy these companies and they’re great businesses.

“In Asia you need to refresh your views quite frequently.”

He adds that the quality of research available “has probably got worse throughout my career. Things like MiFID (Markets in Financial Instruments Directive) and a passive focus has meant the focus has been on large caps.”

Though Sacks says a passive focus also presents an opportunity for active fund managers to take initiative and make the most of the fast-changing market.

Artificial intelligence is part of the story, but not all of it

Although the broader Asian small caps market encompasses many diverse firms, the current focus of much of the market is, unsurprisingly, artificial intelligence (AI).

While historically the Asia focus fund has been most heavily weighted towards the domestic-oriented India market, the AI boom has shifted the focus to export-oriented Taiwan and Korean markets.

This is a function of good performance coming from firms in that sector, particularly in the semiconductor supply chain.

Sacks said the other factor to consider is that “the market has actually rewarded that part [Taiwan and Korean] of the market much more than other parts. So the index and our portfolio weights have drifted upwards.

“I think we’ve been taking profit from our AI winners for at least the last 6 months and the weight has still crept up. So we’ve had some fantastic stocks in that space.”

The performance of some of these firms, like TSMC and Samsung Hynix, has been boosted by the fact there are very high barriers to entry in the supply chain and the firms who already occupy the area are able to profit from the huge boom in AI.

“There’s a lot of money being thrown at AI at the moment, driven by the US, and the Asia supply chains really earn this profit up front because they develop the chips [needed for AI]. They’re the ones doing the cooling, they’re the ones doing the testing and the services side.”

Sacks adds that the fund is also looking at the firms that are benefiting from the AI boom too.

“We increasingly find second or third order derivative plays on AI which are just emerging. Those businesses that are part of the AI-driven part of the [market] weren’t there before. These are very leveraged plays on AI. So many of these names have actually done better than TSMC which again I think goes to show that you don’t need to necessarily buy TSMC or large cap to get that AI and tech exposure.

“The nice thing in our space is that it can be more diversified than a single stock, and actually within our portfolio tech is not as high as it is in a large cap portfolio.”

For more on the opportunities in Asian small caps, the tech supply chain, and the consumer sector, you can listen to or watch the full episode of MoneyWeek Talks wherever you get your podcasts.