Future Returns: Finding Value in Asian Emerging Markets

Chinese regulators have been cracking down on the nation’s tech companies—sending stock prices reeling—but Frank Brochin, senior portfolio manager in the institutional advisory practice at the Colony Group in Boston, is confident the long-term growth story for China will continue to pay off for investors.

To Brochin, who manages money on behalf of endowments, foundations, and family offices, Chinese stocks will continue to strengthen from long-term growth factors fueling the economy, including the rise of the urban middle class, increasing domestic consumption, and the growth of the services economy.

The story is similar, if not even more attractive, in India and Southeast Asia, making “developing Asia” among the best places to invest in the world today for long-term investors, according to Brochin.

“Unlike other emerging markets, in Asia you have a secular economic and social transformation taking place,” he says. These factors “will give economic growth for the next couple of decades, while at the same time the markets are attractive.”

Penta recently spoke with Brochin about his views on investing in Asian markets, even as declining Asian tech shares contribute to driving emerging market indexes south. For the year through Aug. 23, the iShares MSCI Emerging Markets exchange-traded fund (ticker: EEM) is down 2.33% compared with a 17.4% gain in the iShares MSCI World ETF (URTH).

For institutional investors, Colony invests almost exclusively in active managers in emerging markets who have an on-the-ground presence and can select public and private companies poised to benefit from the dual trends of urbanization and rising domestic consumption.

Why China Remains a Good Bet

The performance of Chinese tech stocks such as Alibaba Group Holding Ltd. (BABA), Tencent Holdings Ltd. (700.Hong Kong), and ride-hailing company Didi Global (DIDI) began grabbing headlines in the fall of 2020 as they attracted increasing attention from the country’s regulators. In November, Ant Group’s anticipated US$3.4 billion initial public offering was suspended after executives of the Alibaba payments firm and Jack Ma, founder and controlling shareholder, met with Chinese regulators.

But Brochin says China’s heightened scrutiny is about catching up to regulations that Western countries, including the U.S., have had in place for years, and they are looking beyond tech to also include pharmaceutical companies, real estate, and other domestic industries.

China is a country emerging from a period of strong economic growth that “suddenly finds itself with Alibaba representing 20% of [the] gross market value of all retail sales in China,” he says. “In effect, they are truly just catching up and trying to align business practices with the long-term interests of the nation.”

In Brochin’s view the crackdowns are “not an assault on private entrepreneurs.” The Chinese Communist Party knows they need continued economic prosperity and economic growth to stay in power, and “they know the private sector provides that prosperity to the people of China,” he says.

India as a “Favourite Place” to Invest

The urbanization and increasing domestic consumption happening in China is also occurring in India, although the social and economic transformation of the country has a longer way to go, Brochin says.

Nearly half the population of India, for instance, is still employed in agriculture or agricultural-related jobs, he says, which points to the potential for growth as that percentage declines.

With only about US$2,000 of gross domestic product per capita in India, compared with closer to US$10,000 of GDP/capita in China, the country has a long runway for growth, Colony said in an earlier report.

India also has “a very young and growing population” versus China, which “has plateaued,” and it is “a more domestically focused economy and a Democracy,” Brochin says.

Also, household expansion in India’s urban areas is growing at about 4.4% a year—faster than its population growth of about 1.1%—because the trend is for multi-generations of families to no longer live under the same roof, according to Colony.

Another benefit: India applies “the rule of law” and its stock market is similar to the west, Brochin says.

“The growth drivers are the same as in China, but will take place over a much longer period of time,” he says, adding that India is the firm’s “favourite place in the world outside of the U.S. where we invest.”

The Benefit of Inefficiencies in Southeast Asia

Colony also favours selective investments in Southeast Asia, noting that the region—from Bangladesh to Indonesia—is home to about 850 million people, more than in the U.S. and Europe combined.

“You have a seriously critical mass of population and a critical mass of economic activity,” Brochin says.

And countries in the region, which include Vietnam, the Philippines, Thailand, and Cambodia, are affected by many of the same growth drivers as China and India as people move from rural areas to the cities. Many Southeast Asian countries, too, are at the very beginning of this growth trajectory, meaning their economies should continue expanding for a couple of decades.

One difference is that the markets are inefficient, volatile, and there is very little stock research—factors that can provide an opportunity for those who know where to look.

In a report, Colony points out that there are more than 4,400 companies trading publicly in Southeast Asia, while the percentage covered by analysts ranges only from 8% in Bangladesh to 42% in Thailand.

“If you use active managers, people who are on the ground who can find companies that few investors have paid attention to, you can do well in Southeast Asia,” Brochin says.

As the war against Hamas dragged into 2024, there were worries here that investment would dry up in Israel’s globally important technology sector, as much of the world became angry against the casualties in Gaza and recoiled at the unstable security situation.

In fact, a new survey found investment into Israeli technology startups grew 28% last year to $10.6 billion. The influx buoyed Israel’s economy and helped it maintain a war footing on several battlefronts.

The increase marks a turnaround for Israeli startups, which had experienced a decline in investments in 2023 to $8.3 billion, a drop blamed in part on an effort to overhaul the country’s judicial system and the initial shock of the Hamas-led Oct. 7, 2023 attack.

Tech investment in Israel remains depressed from years past. It is still just a third of the almost $30 billion in private investments raised in 2021, a peak after which Israel followed the U.S. into a funding market downturn.

Any increase in Israeli technology investment defied expectations though. The sector is responsible for 20% of Israel’s gross domestic product and about 10% of employment. It contributed directly to 2.2% of GDP growth in the first three quarters of the year, according to Startup Nation Central—without which Israel would have been on a negative growth trend, it said.

“If you asked me a year before if I expected those numbers, I wouldn’t have,” said Avi Hasson, head of Startup Nation Central, the Tel Aviv-based nonprofit that tracks tech investments and released the investment survey.

Israel’s tech sector is among the world’s largest technology hubs, especially for startups. It has remained one of the most stable parts of the Israeli economy during the 15-month long war, which has taxed the economy and slashed expectations for growth to a mere 0.5% in 2024.

Industry investors and analysts say the war stifled what could have been even stronger growth. The survey didn’t break out how much of 2024’s investment came from foreign sources and local funders.

“We have an extremely innovative and dynamic high tech sector which is still holding on,” said Karnit Flug, a former governor of the Bank of Israel and now a senior fellow at the Jerusalem-based Israel Democracy Institute, a think tank. “It has recovered somewhat since the start of the war, but not as much as one would hope.”

At the war’s outset, tens of thousands of Israel’s nearly 400,000 tech employees were called into reserve service and companies scrambled to realign operations as rockets from Gaza and Lebanon pounded the country. Even as operations normalized, foreign airlines overwhelmingly cut service to Israel, spooking investors and making it harder for Israelis to reach their customers abroad.

An explosion in negative global sentiment toward Israel introduced a new form of risk in doing business with Israeli companies. Global ratings firms lowered Israel’s credit rating over uncertainty caused by the war.

Israel’s government flooded money into the economy to stabilize it shortly after war broke out in October 2023. That expansionary fiscal policy, economists say, stemmed what was an initial economic contraction in the war’s first quarter and helped Israel regain its footing, but is now resulting in expected tax increases to foot the bill.

The 2024 boost was led by investments into Israeli cybersecurity companies, which captured about 40% of all private capital raised, despite representing only 7% of Israeli tech companies. Many of Israel’s tech workers have served in advanced military-technology units, where they can gain experience building products. Israeli tech products are sometimes tested on the battlefield. These factors have led to its cybersecurity companies being dominant in the global market, industry experts said.

The number of Israeli defense-tech companies active throughout 2024 doubled, although they contributed to a much smaller percentage of the overall growth in investments. This included some startups which pivoted to the area amid a surge in global demand spurred by the war in Ukraine and at home in Israel. Funding raised by Israeli defense-tech companies grew to $165 million in 2024, from $19 million the previous year.

“The fact that things are literally battlefield proven, and both the understanding of the customer as well as the ability to put it into use and to accelerate the progress of those technologies, is something that is unique to Israel,” said Hasson.

Future Returns: Finding Value in Asian Emerging Markets

Where to look in Asia’s emerging markets.

The 28% increase buoyed the country as it battled on several fronts but investment remains down from 2021