If you speak to a number of investment fund managers, they'll tell you it would be foolish not to capitalise on the burgeoning Asian markets, with growth forecast to continue for some time to come.
In the next five to 10 years global economic growth is primarily going to be driven by Asia, particularly China and India, Premium China Funds Management executive director Simon Wu says.
"It's nearly unforgivable for any portfolio down the track to not have a larger Asian or China exposure for the simple fact that China is 15 per cent of the world's equity market and Asia is 25 per cent of the world," Wu argues.
"But if you look at a majority of portfolios, they would not have that proportion in terms of exposure, yet if you ask any adviser out there which part of the world is going to grow faster, they'll tell you it's China and Asia, but what they conclude is not reflective of what they have done.
"Investing in China or the rest of Asia is a once-in-a-lifetime opportunity, but investors must do it now."
The fact China recently announced a large trade surplus of $20 billion is another reason for investors to look to Asia as a region to provide compelling investment opportunities.
"If we're talking about picking a region to invest in it has to be Asia and I personally cannot see how you can beat Asia as a geographic asset allocation," Wu says.
Fidelity Asia Fund portfolio manager David Urquhart notes investors should really be focusing on Asia's position in the world right now.
"According to Forbes, 21.5 per cent of the world's top 2000 companies are now headquartered in Asia ex-Japan," Urquhart says.
"Asia already accounts for around a quarter of global manufacturing and yet in MSCI world it accounts for less than 7 per cent of the index.
"So I would think that if you want to try and replicate what's going on in the real world into investment portfolios, you not only have to have exposure to a global equity portfolio, but you really want to try and add to that to reflect the economic reality of what's going on in Asia."
While China and India are looked upon as the two countries offering the most attractive investment prospects, the growth of Indonesia has also recently made it onto the radar of fund managers and economists.
"The strategists and economists that are more Asian focused say 'Chindonesia' instead of 'Chindia' in order to include Indonesia," Urquhart says.
"Those three countries are the areas of focus and you can see why because of the growth rates expected over the next decade; China is consistently 8 per cent or more, India is 6 to 7 per cent and Indonesia is around 6 per cent or better and continuously delivering that kind of growth."
Indonesia's large population of around 240 million, its young demographic, improving living standards and the fact it's strong in agricultural commodities, such as rubber, palm oil and coal, all add to its potential for further growth, he adds.
AMP Capital head of Asian equities Karma Wilson agrees Indonesia represents a great investment opportunity.
"We have quite a high exposure to places like Indonesia, which are quite small on the index, but it's a country that has a great demographic, it's got an improving and quite positive political and economic environment," Wilson notes.
"We see a lot of great resource opportunities there so I think what we aim to do is offer products where the managers have the flexibility to find the best possible opportunity in quite a vast universe and capitalise on those for our investors. "It's interesting to note the increase in interest amongst our clients and advisers that we speak to of accessing Asia and how they do get exposure to China and India - that has definitely increased, particularly as the outlook for the US and Europe looks a bit more benign and Asia is very relatively attractive."
However, while Urquhart says China, India and Indonesia are becoming key drivers, he says there are ripple effects that are spreading out beyond these countries and into other regions of Asia.
He notes that if people are looking at low-cost producers within Asia, they are no longer looking to China, but Vietnam, Indonesia and Bangladesh.
"Textile industries are starting to move away from China, particularly for the low-end products and so those countries are going to continue to improve," he says.
"China is still there, but they are just trying to provide more value added to what they're producing now.
"So there's a big drive coming through where productivity and the use of more technology will improve production, but also add value to the production and allow them to step away from being a low-cost producer anymore."
While China is now the second largest manufacturer in the world, currently accounting for more than 18 per cent of global value-added manufacturing, technology is still an area it needs to work on.
"Chinese are very frank about it, they say, 'yes technology is the issue; when it comes to very high pressure hydraulics, our hydraulics leak, we're not yet in that point in time where we can actually have a product that is a credible product in the marketplace'," Urquhart explains.
"In talking to the Koreans and Japanese about how long will it take the Chinese to improve their technology, they would say about 10 years and the Chinese would say about five years, so I'd say it's probably a figure somewhere in the middle."
The Chinese are very aware of not just sourcing raw materials from places like Australia and helping Africa to develop its raw material, they are also very focused on trying to obtain the technology they need to move through to the next step, he adds.
"They're doing it by means of investment, mergers and acquisitions and taking advantage of some of the international companies that are stumbling during the global financial crisis," he says.
Urquhart highlights circumstances where technology transfer is going to happen a lot more quickly for not only China but India as well.
"If you look at the auto industry, for example, Geely Automobile in China just bought Volvo, so there's a lot of technology that's being transferred across to China because of that," he says.
"Tata Motors in India recently bought Jaguar Land Rover, so again there's going to be a lot of technology transferred, it's going to come into India and one of the Chinese companies has also bought Saab from the US as well."
Wilson notes the development of the technology industry in Taiwan is also very attractive.
"It's compelling globally so we find a lot of interesting investment opportunities in the technology industry," she says.
Urquhart agrees, noting a technology continuum where while Japan has been the leader, now South Korea and Taiwan are emerging and beginning to be world leaders.
For example, he points out how brands such as Samsung Electronics or LG Electronics have become household names. "If you walk into a JB Hi-Fi it's hard to ignore the fact that some of these brands are no longer the Japanese brands," he says.
"You don't see the European or US brands so much anymore; you're really seeing Asian brands and that's Japanese, Korea and in some cases Taiwanese. And similarly computers, the Taiwanese are very strong there."
Australian Unity Investments head David Bryant observes that while Japan and South Korea are still extremely successful in the industrial sector, they may have reached their peak and are now faced with serious problems such as ageing populations.
"While they still lead the world in autos, computers, electronics, they still have staggering industries, but the problem is those industries risk getting diverted," Bryant says.
Despite the fact he believes South Korea and Japan may have had their best days, he admits they are still very influential in Asia.
"For example, the regional capability for electronics is still driven from Japan even if a lot of the manufacturing is progressively being done elsewhere," he says.
"All of the intellectual property is still in Japan, so it will be successful for a long period just by having those skills and resources to share with the rest of Asia."
The main types of growth investors are looking for out of Asia have to do with the secular, demographic and structural trends that are leading to both wealth creation and also increased consumption in the region, Seres Asset Management chief investment officer Evan Erlanson observes.
"These are the trends that we try to reflect in our portfolios. The key theme in terms of demographics is really urbanisation in both China and India, which is leading to a larger consumer base, a larger workforce and so this actually leads to increased consumer activity and increased demand," Erlanson says.
"Now in terms of structural trends, there are changes in the legal codes and also land ownership rights, for example.
"Also, the 'financialisation' of the economy, which basically allows a greater swath of the population to have access to financial instruments, to credit and that also leads to increased demand and asset price reflation."
The recent market shake-out has led to the creation of a lot of attractively valued opportunities and, as a result, Erlanson says it's important to focus on and take advantage of some of the long-term secular trends occurring in Asia.
"Key sectors that we think are worth focusing on would be the auto sector, agribusiness, the property sector in selected markets, healthcare and emerging technologies, such as LEDs (light emitting diode) and OLEDs (organic light emitting diode)," he explains.
"These are areas where as the market has been extremely volatile, it's creating areas where I think analysts and also the fund managers have been neglecting some of the up-and-coming trends.
"But this gives active investors and active fund managers a lot of opportunities, so I think it's actually quite an interesting time to be looking at long-term opportunities in a lot of these Asian markets across the board."
When investing in Asia, there is a consensus among fund managers that active management is particularly important for investors to consider if they wish to reap the performance returns.
"If you are an active manager and you're looking, our philosophy is to find companies that offer superior returns to capitalise on the growth opportunities of Asia," Wilson says.
"So we're specifically looking for companies that reflect the growth opportunities in these markets and we have no problems finding those types of companies." However, because Asia has had so much positive capital flow in the past decade, a significant amount of money has been invested into junk companies and this has been reflected in the performance of the index in many ways, according to Premium China Funds Management head of distribution and operations Jonathan Wu.
"You cannot just invest into a broad index," he argues.
"You have to be able to do very intense stock selection as opposed to just investing in broad markets."
Erlanson shares this sentiment. "You really need active managers with an ear to the ground as to what's going on," he says.
"Because what we've seen year to date is the Chinese and Hong Kong stock markets underperforming pretty dramatically versus the region, despite the fact that economic growth was there, so obviously something is going on."
He highlights this was a consequence of policy-driven euphoria in the market in 2009 that's been followed by a policy-driven hangover in 2010.
"Also, naturally as you have a cyclical recovery you get a period of multiple compression in the market as people wait to see what's next," he says.
"So in knowing how to time the various markets according to what point of the cycle you're in and also according to expectations on policy, that's really what the fund manager is there for.
"So I think it's definitely been very necessary to be quite nimble in allocating between different markets in Asia over the past two years in order to take advantage of where the growth is actually coming from and also where the policies or lack of policies are going to be most supportive in the medium term."
Similarly, Insync Funds Management chief investment officer Monik Kotecha says the economic performance of Asia is not always reflected in stock prices.
"The poor performance of the Shanghai Stock Exchange this year has not mirrored the growth coming from the Chinese economy and suggests there can often be a weak correlation between economic growth and the returns of equity investments in the same markets," Kotecha notes.
"In addition, by simply owning a company domiciled in the region does not necessarily provide the investor exposure to the same region. Samsung, the Korean electronics giant, has a heavy 40 per cent of its sales exposure to the European and US consumer."
Furthermore, she argues Asian stocks are too expensive to be the best pathway when investing in China and India.
Multinational consumer brands are trading at price to earnings (PE) of around 12-14 times as opposed to comparable Asian consumer stocks that trade on PEs in excess of 18 times, she explains.
"We struggle to see how these local stocks deserve a 30-40 per cent premium over multinationals," she says.
"Nestlé, PepsiCo and McDonald's are stocks that have been trading in Asia for decades and have established infrastructure, brand awareness and pricing power.
"We see these stocks as giving access to Asian consumers, particularly those who will pay a premium for aspirational brands."
The corporate governance of Asian companies is yet another reason why it's important to have an active manager when investing in the region. While Wilson says there are differing degrees of robustness in the corporate governance framework in Asia, all are improving.
"I think Hong Kong and Singapore would be global standard but that's one of the reasons I think it's quite compelling to have an active manager in Asia," she says.
"Because they're going out and visiting the companies and understanding their corporate governance practices and investing with the appropriate companies that display good corporate governance the same way that you would do active investments in Australia."
Similarly, Erlanson observes there are undoubtedly some very positive trends in corporate governance that are occurring at present.
"There have been a lot of measures taken to encourage greater transparency, more frequent and more detailed financial reporting and I think also a lot of the companies have evolved as a result of pressures that have been exerted upon them by the outside world," he says.
"One example would be Japanese corporates responding to the pressures of their strengthening currency and I think that a lot of these corporates have responded very well both in terms of cost cutting and finding other ways, such as diversifying their production bases, to respond to these types of pressures."
He adds the transparency and corporate governance in Asia have evolved significantly not only during the past five years but also in the past decade.
"Coming out of the financial crisis I think the strengths that have been created by the management teams of these Asian corporates, they really stood out because the balance sheets were there and the coping mechanisms were there to deal with external stresses," he says.
However, while Kotecha agrees the corporate governance and the transparency of company structures, costs and direction in Asia are improving, she says it's still a cause for concern in terms of investing locally.
"This improvement is also reflected in a growing dividend culture and Insync continue to review potential new opportunities," she notes.
"Corporate governance structures of developed world multinationals is well-established and continue to today offer a better risk-adjusted way of investing into the growing markets of Asia."
Furthermore, Urquhart highlights the importance for investors to focus on the policy that is emerging out of China.
"It is going to be way more important than people have been used to in the past. China is just finishing its eleventh five-year plan and in October they've got the next meeting of the Communist Party to decide what happens for the next five years," he says.
"That's going to be crucial if you're looking as far as what China is going to be focusing on for the next five years."
However, he notes that although China is undergoing rapid transformation, it is still very much in favour of gradual change.
"If they change something they really do it step by step and look at what's going on and what impact is it having," he explains.
"What they're trying to balance is they want to continue to have employment growth in their country and they don't want rapid movement towards some of those lower income countries such as Bangladesh.
"So they're trying to balance a large population where they need to continue to supply jobs as well as the stepping up in value added and the improvement of China's position and the development of their own brand names. "They are very much looking at a balancing act so as far as when do they move to a free float, we're talking probably 20 years away."
Bryant adds China's political framework is far too resilient for its growth story to fail.
"From a distance we all think there's a couple of people setting policies in Beijing and if they get it right it will be good and if they get it wrong China's growth story will fail, but nothing could be further from the truth; it is way too resilient to be mucked up by any one person or any set of decisions," he says.
"To be a mayor in China is more powerful than being the prime minister of Australia and they've got 50 of them and there's no politics, they don't get judged in some poll, they just get judged on their results.
"In Beijing they do have central government that sets some country-wide policies, but you've got all of these regions that are really working with a good degree of independence and autonomy and a lot of accountability with some extraordinarily smart and dedicated people."
The Chinese government, however, does still have a lot of involvement in the ongoing development of various key industries, Bryant notes.
"For example, banks that want to grow into each other's area . the government will let a couple of banks do a bit of work in each other's area and then they'll work out who they think is the best, then they'll make one a multi-regional bank and the other a city bank," he says.
"It's as though there's this conscious effort about building almost perfect competitive pyramids around different key industries and I got a sense of that not just in banking but in auto manufacturing as well.
"They don't want 20 auto makers all trying to be national players; they want to, for example, have two national champions and then six regional players and help bring them into a more orderly industry and it's the same with their banks; they want some to be international, some to be national, others regional and some city banks."
