Unlocking diversification and growth opportunities in a dynamic region – Asia Pacific ex Japan

The Asia Pacific ex Japan region has emerged as an important element of some multi-asset portfolios. Incorporating Asia Pacific ex Japan equities can enhance diversification and provide exposure to some of the world’s fastest-growing markets.

The term ‘Asia Pacific ex Japan’ refers to a collection of countries within Asia and Oceania, excluding Japan. This exclusion was historically due to several reasons, including the maturity of the Japanese economy, the size of its equity market capitalisation, which risked overshadowing the performance of smaller Asian markets and distorting the indices, and the role of institutional investors who often manage their allocations to Japan separately.

The region typically includes: China, Hong Kong, South Korea, Taiwan, Singapore, Australia, New Zealand, India, Indonesia, Malaysia, Thailand, the Philippines, and other emerging economies within Southeast Asia. These countries collectively represent a spectrum of economic development, from advanced markets like Australia and Singapore to rapidly developing nations such as India and Indonesia.

Several key indices track the performance of Asia Pacific ex Japan equities. Among the most prominent are the MSCI Asia Pacific ex Japan Index and the FTSE Asia Pacific ex Japan Index. Both include around 12 emerging and developed markets. One of the interesting differences is the treatment of South Korea. The MSCI index classifies South Korea as an emerging market, whilst the FTSE index classes it as a developed market. This gives plenty of scope depending on allocation preferences. Some investors, for example, invest in developed Asia Pacific funds and take emerging Asia exposure through a dedicated global emerging markets allocation.

Despite their differences, these benchmarks provide broad coverage of the region’s equity markets, covering a wide range of sectors and companies. The indices are widely used to gauge market trends, assess risk, and construct portfolios that accurately reflect the region’s diversity.

Including Asia Pacific ex Japan equities in multi-asset portfolios can offer several advantages:

• It enhances diversification by reducing reliance on the UK, US and Japan, which can be more correlated. The region’s varied economic cycles, currencies, and industry exposures can help mitigate portfolio volatility and improve risk-adjusted returns.
• The growth potential is considerable, with many countries experiencing rapid economic expansion and demographic tailwinds. Access to innovative companies and emerging sectors provides opportunities for exposure to faster growing companies.

Despite its appeal, investing in Asia Pacific ex Japan equities is not without risks:

• Parts of the region are characterised by higher volatility, driven by factors such as fluctuating currencies, and political instability. Furthermore, the region’s dependence on global trade exposes it to shifts in economic policy and external shocks, including geopolitical tensions.
• Regulatory challenges, such as restrictions on foreign ownership, varying corporate governance standards and sudden policy changes, may also pose challenges for investors. Thorough due diligence and robust risk management strategies are crucial when allocating assets.

The Asia Pacific ex Japan region offers diversification, growth, and innovation, making it an important consideration for multi-asset equity portfolios. But, while the opportunities are significant, so too are the risks, requiring careful analysis and ongoing vigilance. For investors and advisers, a balanced approach to including Asia Pacific ex Japan equities can help harness the region’s potential while navigating its inherent challenges.