With concerns over tech stock concentration and valuations in the high-flying US stock market, investors are looking to spread their wings - and way to do that could be by investing in Asia.

In this column, Ryan Lightfoot-Aminoff, investment trust research analyst at Kepler Partners, explains why worries over Donald Trump's tariffs have created an opportunity to buy at a discount.

Asia is home to many exciting growth opportunities, supported by a young, dynamic population with an entrepreneurial mindset.

Some of the world’s leading companies have emerged there over the past few years, the best example being Taiwan Semiconductor, which has been at the core of the AI boom, leading to a share price rise of almost 750 per cent in the past decade.

Asia generates around 60 per cent of global growth, according to the IMF – punching well above its weight in terms of its 40 per cent share of GDP.

Yet despite this, UK investors have just a small percentage of their investments in the region, with allocations to Asia (ex-Japan) making up less than 3 per cent of assets in both open- and closed-end vehicles.

When looking at the headlines, this caution is understandable. Just in the past couple of years, we have seen a martial law crisis in South Korea, a property sector collapse in China and history’s largest banking fraud in Vietnam.

Whilst markets can recover from these – as we have seen in significant rallies across many Asian markets – many investors are now worried about the prospect of significant tariffs imposed by the US administration.

But by focusing on these potential downsides, investors may be overlooking Asia’s strong upside potential, as well as ignoring the diversity of a region spread across many different countries with varying dynamics driving markets.

Investors looking for growth – particularly those with long-term horizons and the ability to ride out short-term volatility shocks – should consider an allocation to Asia in their portfolios.

Investment trusts are one route into the region, with a considerable range on offer in terms of manager style, risk appetite, and country and sector focus, allowing investors to approach allocation to Asia in a way that fits individual investment needs.

In light of ongoing concerns around tariffs and other risk factors, many of the Asian investment trusts are also trading on significant discounts, offering potential valuation opportunities.

The Asia investment trust opportunities

Pacific Assets (PAC) is one example. Managers David Gait and Doug Ledingham have a risk-conscious approach, with an absolute return mindset and a strong focus on preserving capital.

Despite being arguably one of the least risky Asian investment trusts, with the lowest beta and downside capture ratio in the sector, PAC has been the best-performing fund in the AIC Asia Pacific category in NAV terms over the past five years.

PAC looks to identify high-quality management teams running high-quality franchises that are aligned with David and Doug’s own values and time horizon – often investing in family businesses that are professionally managed.

Over decades of investing in Asia, the managers have found a greater number of families who share their long-term mindset to invest alongside in India and South-East Asia. Here, demographics are attractive, and the penetration of goods and services is low. This creates exciting new markets for businesses to capitalise on over the long-term.

The managers themselves take a ten-year view when analysing investments which they believe is a considerable competitive advantage in an increasingly short-term world.

More recently, David and Doug have been taking advantage of a cyclically weak economy and low valuations to partner with entrepreneurs in China.

Historically, they have struggled to find ideas in the country due to a misalignment with the goals of the considerable state-ownership in some companies, but the managers are identifying a greater number of high-quality management teams building world-class franchises that are well-positioned for long-term growth. The outcome of bottom-up stock selection is a rising portion of PAC’s capital invested in China.

David and Doug’s focus on high quality stewards and franchises has proved beneficial in the past five years, with the trust’s portfolio having enjoyed NAV returns of 44 per cent – nearly double that of its benchmark.

However, weak sentiment towards the region and investment trusts more generally has impacted PAC’s share price, creating a discount on the trust’s shares of c.14 per cent.

This means investors can effectively buy in at 86p to the £1, accessing a portfolio of well-managed, high-quality, cash-generative companies with a strong market position. This smart portfolio explorer tool on Pacific Assets manager Stewart Investors website lets you find out more about them. As such, PAC is a potentially great way of capturing Asia’s growth whilst protecting against possible risks.

Richard Sennitt, manager of Schroder Oriental Income (SOI) and co-manager, alongside Abbas Barkhordar, of Schroder AsiaPacific (SDP) has taken a slightly more nuanced approach to the region’s challenges.

Due to similar concerns over Chinese governance, Richard and Abbas prefer to take exposure to China’s economy through holdings in Hong Kong companies, which act as a proxy. Many Hong Kong firms generate substantial revenues in China, but governance rules are stricter, helping mitigate risk.

This still allows both trusts to benefit should China enjoy a recovery, as was the case in the stimulus-led rally beginning in September last year. Here, the Chinese government launched a series of intervention measures designed to address core economic issues, from a crash in the property sector to rising unemployment.

This has led stocks in China to rally from their lows. Despite this, some investors felt the scale of the measures wasn’t enough, though many commentators are expecting more stimulus to come this year – a likely benefit to Richard and Abbas’ Hong Kong holdings.

Looking beyond China, the managers have invested in companies looking to diversify their supply chains over the fear of tariff impacts.

A number of businesses have adopted a ‘China +1’ approach, meaning they have moved manufacturing to other Asian countries to avoid the worst of the tariffs’ impact, whilst still enjoying the benefits of a competitive cost base in the region. Countries such as Vietnam have been beneficiaries of this trend, which is 3.4 per cent position for SDP, despite not featuring in the benchmark.

Both SDP and SOI also have a big allocation to technology, with a particular focus on the semiconductor supply chain. Many industry-leading companies like South Korea’s SK Hynix and Taiwan’s MediaTek are native to the region and have been significant drivers of Asia’s growth in recent years. Whilst volatility in the region has been a headwind, these firms are sector leaders, and therefore deeply embedded in global supply chains. 

With tech becoming an ever-increasing part of our lives, investors staying away from Asia could well miss out on the potential growth these tech stocks are likely to benefit from.

Smaller companies investing in Asia

Along with large-cap tech, smaller companies in Asia have been a notable positive. In contrast to most developed markets and broader global indices, smaller companies have outperformed their larger cap peers in Asia during the volatility of the past few years.

Furthermore, smaller companies are usually focused on the domestic economy, insulating them from the impact of tariffs whilst also offering portfolio diversification benefits for investors. This is because the dynamics driving these smaller companies are likely to be significantly different to those impacting the performance of UK and US companies.

Due to the managers’ current ‘anti-tech’ positioning, Fidelity Asian Values (FAS) may offer investors particular diversification benefits. Nitin Bajaj and Ajinkya Dhavale believe that valuations in the tech sector have gone too far and have therefore decided against investing in many of them.

Instead, they have focussed on the likes of China due to the large number of attractively priced companies resulting from negative market sentiment. Nitin and Ajinkya have also taken considerable exposure to Indonesia as they believe the country has very similar traits to India, in that it has a young, populous workforce and a government focussed on reform – but with companies here trading at much more attractive values.

Indonesia also has a low weight in the smaller companies index at under 2 per cent, meaning many other investors are overlooking the attractive companies such as Indonesian banks, which are considered some of the best-managed in the Asian region.

Despite FAS enjoying a rally in late September last year, buoyed by China stimulus measures, its shares trade at a wide discount to NAV. The current level is 9.68 per cent, compared to its five-year average of 7.1 per cent, although the trust has traded at par (where the discount is zero) at numerous points in the past five years.

As such, FAS not only could offer upside from its portfolio of undervalued, smaller Asian companies, but also from the discount narrowing potential should sentiment return to the region and the trust itself.

The verdict on Asia

The prospect of tariffs may loom large over Asia’s outlook, but that is also the case for regions including Europe, the UK and Latin America.

The key difference for Asian countries is that they have faced this issue for many years, meaning they are arguably better placed to weather the storm. Asia’s diversity means there are still several areas that could prove very attractive opportunities; investment trust managers are looking to capitalise on these in various ways.

Furthermore, broader negativity towards the region has led to depressed valuations, providing an attractive entry point for long-term investors – an attraction supported by the wide discounts available on many investment trusts.