Emerging markets rebalancing
Falling oil prices and the adoption of reform agendas means Asia could soon account for three-quarters of the MSCII Emerging Markets Index, said Catherine Yeung, investment director for Asia ex-Japan equities at Fidelity Investments.
Asia's portion of the MSCI Emerging Markets Index was about 25% during the late 1990s, Yeung said, speaking at the Fund Selector Asia Investment Forum in Bangkok.
"Now it's about 68%. Most investors are questioning why they don't just buy Asia outright [instead of exposure via emerging markets]. Considering the issues in the other EM countries, 68% could go to 75%."
The reform factor
Lower oil and commodity prices bode well for Asian economies, which are largely oil consumers. Moreover, deep economic reform agendas are progressing in several Asian countries, driven by India, China and Indonesia.
However, falling commodity prices are a negative for other emerging market economies, including South Africa, Brazil and Russia, the oil producers.
A compounding negative factor for these economies is the lack of reforms.
"Asia is reform driven, Latin America or Russia is not. Because they don't have a proper reform schedule in place, they are likely to lag. This is all being reflected in the index," Yeung said.
Key man risk
Yeung was positive on the structural reforms in India and Indonesia and China.
China ADRs will be included in the MSCI China index and an assessment for A-shares is coming in June, she said. "That will better reflect what were seeing on a global platform. China is still less than 3% of global markets."
She added that China's anti-corruption drive is "China's new austerity" and the effort is in capable hands as President Xi Jinping has an "amazing consolidation of power". However, she said that as reforms are carried out, China must maintian adequate GDP growth.
"Asian markets headwinds are cyclical. In June you may see markets down due to China's PPI data or some other indicator. But Asia tailwinds are structural."
Reforms have become so important that the biggest risk to Asian markets is a derailment of reforms caused by something happening to one of the country's leaders, she said. It is critical that they stay at the helm.
"[Prime Minister Narendra] Modi's leadership is a game changer for India," she said. "But we now have created a situation where we've got key man risk."