So where in Asia should you invest? One place to look would be at markets that are less vulnerable to the ups and downs of the economic cycle.
“Defensive” sectors are those less sensitive to an economic slowdown, like health care, telecoms, utilities, and consumer staples (like food). People go to the hospital, smoke cigarettes, watch cat videos on their phones and turn on the lights, regardless of how the economy is doing.
In Asia, the stock markets of Indonesia, Malaysia and Thailand are more defensive, because they have a larger share of companies from these sectors.
Defensive companies are the opposite of “cyclical” companies, which are more sensitive to the economic cycle and to changes in demand. These include commodities companies, big industry, car makers, hotels and information technology companies. When economic times are tough, people tend to spend less money on these sorts of goods. Stock markets in Hong Kong, Japan and Taiwan have a higher percentage of shares in these sectors.
For example, defensive sectors make up 37.6 percent of the Kuala Lumpur Composite Index, and 42 percent of Indonesia’s stock market. But, defensive sectors make up just 10.2 percent of Taiwan’s stock market, and 20.2 percent of South Korea’s.
By contrast, cyclicals make up three-quarters of the market capitalization of Taiwan’s stock market, and just over half of China’s. That means that companies in those markets are a lot more vulnerable to changes in the economy.
How have cyclical markets and defensive markets performed in recent months? The trend isn’t very clear, although markets with a more defensive orientation have done a bit better.
In 2016 so far, Thailand, Indonesia and Malaysia have been three of the four best-performing markets in the region (along with heavily cyclical Taiwan). Over the past year, cyclical Korea has done the best (although it’s still down for the period), while more defensive Singapore has been the worst performing market.
But just because a market does better doesn’t mean you won’t lose money in it as well. Defensive markets can still be volatile. And of course there are a lot of other factors, like earnings growth and valuations, which affect stock market performance.
But if Asian economies slow down – as China’s economic growth slows, and if the U.S. moves into recession – the more defensive stock markets in the region may begin to outperform more consistently.
So, consider that the next time you look at the big picture for markets.
The easiest way to invest in the region’s more defensive markets is to use ETFs (exchange traded funds). For Indonesia you can try the db x-trackers MSCI Indonesia Index UCITS ETF (code: 3099, Hong Kong); for Thailand, try the XIE Shares Thailand (SET 50) ETF (code: 3069, Hong Kong); and for Malaysia, the db x-trackers MSCI Malaysia Index UCITS ETF (code: 3082, Hong Kong).