Small- and mid-cap funds may be a better way to play Asian growth story

(Aug 7): As interest in the US equity market wanes, Asian equities are back in vogue. Structural reforms and economic liberalisation in large markets such as China and India are expected to boost corporate earnings and investor sentiment. And growing consumption continues to be a valid investment theme for most countries in the region.

Chetan Sehgal, director of global emerging markets and small caps at the Templeton Emerging Markets Group, part of Franklin Templeton Investments, says EMs still offer plenty of growth as rising affluence brings opportunities for companies. “After a period of currency and commodity price adjustments and widespread political change, many of the emerging economies are now improving. Many of the factors that originally attracted investors to the EM equity asset class have come back into play, including stronger earnings growth, higher economic growth and robust consumer trends.”

How can investors get in on the action? Paul Rathband, a fund manager for Asia ex-Japan equities at Schroders, thinks it is important for investors to gain exposure to smaller companies. “It is far easier for smaller companies to grow at a faster clip. And where we see accelerated growth at an early stage in Asian companies, we also see returns,” says Rathband in a recent article circulated to the media. He also points out that many large caps in Asia are state-owned enterprises, which have “generally poor corporate governance and are often apathetic towards the interest of minority shareholders”.

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