The last time Asian equity funds outperformed their US peers was in 2012 but performance this year has led some to suggest that they could be on track to repeat this in 2017.
The MSCI AC Asia ex Japan index has returned 24.28 per cent – in sterling terms – over the year to 31 August, compared with a 6.38 per cent rise in the US blue-chip S&P 500 index.
As the below chart from asset manager Schroders shows, Asian stock markets have outperformed while the US dollar has fallen in value.
Source: Schroders
Tim Phillips, investment communications professional at Schroders, said the weak US dollar had boosted Asia stocks during the past year.
He said: “US dollar weakness is usually a positive signal for Asian stock market performance. It generally results in an increase in capital inflows, boosting demand for stocks in the region.
“It’s also good for those Asian companies which have loaded up on dollar debt in recent years, as the cost of servicing that debt is lowered.”
He added: “Recent weakness in the greenback has seen the dollar index fall 8.9 per cent year-to-date, but has coincided with robust returns for Asian stocks.
“The MSCI AC Asia ex Japan index has seen gains of 28.2 per cent in the same period, comfortably outperforming returns from global equities.
“It remains to be seen how long this run can last and whether it will reverse on the back of renewed US dollar strength or more hawkish signs on rates from the Federal Reserve.”
However, the recent escalation in tension between US and North Korea have cast some doubt over whether emerging Asia stocks can continue to outperform.
Ongoing hostility would keep the Korean stocks under pressure, wrote Oliver Jones, assistant economist at consultancy Capital Economics, and could weigh on other countries in the region.
Further, Jones said the Chinese economy could lose some momentum in the latter part of the year as authorities’ attempts to contain financial risks intensify. Another issue facing the region, according to the economist, is that the strong rally in the IT sector could run out of steam.
From a fund perspective, the average IA North America fund has risen by 118.76 per cent over five years, while the IA Asia Pacific ex Japan sector is up by 80.95 per cent.
Performance of sectors over 5yrs
Source: FE Analytics
However, this year, the average IA Asia Pacific ex Japan fund has risen by 20.53 per cent in 2017, compared with a 6.16 per cent gain for the average IA North America peer in the year to 5 September.
If the trend continued until the end of the year, the Asia ex Japan sector would outperform the average IA North American fund for the first time since 2012, when the average fund rose by 15.9 per cent compared with a 6.9 per cent gain for the latter sector.
It would reflect further strengthening for the sector on the back of a strong year in 2016 when the average Asia ex-Japan fund generated a total return of 25.66 per cent, although it was unable to top the 29.31 per cent gain reported by the North American sector.
Asia funds have outperformed their North American peers before in 2009 and 2010 as well as in 2007, as the financial crisis took hold.
While all funds in the sector have beaten the North America average, few have been able to beat the sector consistently.
While 2016 was a good year for emerging markets – including Asia – 2015 was more challenging as the average fund recorded a 3.35 per cent loss. In comparison, the average North America fund was up by 4.18 per cent in 2015.
Just two funds have outperformed the IA North America average consistently in each of 2015, 2016 and 2017 to date.
The Fidelity Asia Pacific Opportunities fund has risen by 18.85 per cent in 2017. It recorded a total return of 32.28 per cent in 2016, however it was a strong performer in 2015 when it returned 7.19 per cent.
The £60m fund has been managed by FE Alpha Manager Anthony Srom since it launched in September 2014.
Under Srom, the strategy maintains a concentrated portfolio of just 30 stocks spread across 10 countries in the Asia ex Japan region with the aim of achieving long-term capital growth.
As such, the fund is a long-term strategy and not recommended for investors wishing to sell out of the fund within five years.
Performance of fund vs sector & benchmark since launch
Source: FE Trustnet
Since launch, the fund has generated a total return of 73 per cent, compared with a 49.08 per cent rise in the MSCI AC Asia Pacific ex Japan index and a gain of 48.53 per cent for the average IA Asia Pacific ex Japan fund.
While the Hermes Asia ex Japan Equity has an annualised calendar year performance extending back to 2013, the fund has only outperformed the IA North American sector since 2015.
So far in 2017, the fund has returned 27.13 per cent, it was also a strong performer in 2016 with a strong 30.65 per cent gain and was up by 4.24 per cent in 2015.
The five FE Crown-rated, $3.6bn fund is managed by FE Alpha Manager Jonathan Pines, who has an unconstrained value approach to investing. This can result in a portfolio that looks different to its peers, but the fund has a strong track record.
Since launch in 2012, the fund has returned 159.08 per cent compared with a 74.88 per cent rise in the MSCI AC Asia ex Japan IMI index and a 71.04 per cent return for the average fund in the sector.