Asia small cap investing opportunities: in 60 seconds

  • Asia small cap opportunities can be found across the region: China, India and Korea currently stand out from a strategic perspective.
  • Trends like premiumization, the shift from offline to online, tech & innovation, and healthcare offer attractive prospects for small cap stock investors.
  • Asia small caps also offer a way to play the fast-growing electric vehicle sector.

Asia small caps: which Asian country offers the greatest growth potential?

Our investment process is predominantly bottom-up driven and our country allocation is primarily the result of our bottom-up process and an outcome of stock selection.
Having said that, there are certain countries that are more attractive for stock pickers like us.
The Chinese market has many factors that are driving growth for new companies and smaller companies in general.

Source: IMF World Economic Outlook, April 2021

As of end Apr 2021, our biggest market allocation was to China.

This included holdings in autos, condiments, real estate services, materials, IT and retail companies, to name a few.

As GDP growth accelerates, the Chinese middle class is also continuing its growth, both in size and in their level of disposable income.

This is driving some of the business-friendly trends we’ve seen, such as higher spending on health care, education and premium products.

We also expect R&D spending to grow significantly across sectors, ranging from autos, healthcare to IT.

R&D Spending (2019)

Source: R&D World, March 2020

This includes China's move towards import substitution, building out its own IT supply chain and semiconductors production.

This will have a wide ranging impact on countries dependent on exports to China.

We are also keen on India. It appears as an underweight allocation in our portfolio as we felt valuations were high, before Covid-19, for the companies we were interested in.

However relative valuations are looking more attractive given India's underperformance last year and we continue to look for opportunities there.
We have also found Korea an attractive market for stock picking.

Over the longer term, Korea has been one of our key alpha contributors, especially in sectors such as tech and autos/auto parts, given the country's strong focus on advanced manufacturing and R&D.

Which sectors offer the most attractive opportunities for Asia small cap investing?

Broadly speaking, we are focused on trends like premiumization, the shift from offline to online, tech & innovation, and healthcare.

One of the prevalent and sustainable trends in the region is changing consumption patterns.

As Asian economies develop and grow more affluent, consumption and spending patterns are shifting away from basic necessities toward discretionary goods and services.

We also see demand shifting to higher quality, premium brands in individual product categories.

We see this trend across a variety of grocery and personal care products. We see similar trends also playing out in other, more expensive product categories, like automobiles and education, across Asia.

For example, among our holdings is a company running mid- to high-end car dealer services across China.

This company benefitted from resilient demand in the luxury auto space during the covid-19 pandemic.

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