NEW YORK — Institutional investors should make a strategic overweight to Asia's emerging markets to benefit from the region's long-term productivity gains, according to a new white paper by JPMorgan Asset Management officials.
Investors should increase their exposure to Asia ex-Japan over the long term to as much as double the market cap of the region, Rumi Masih, managing director and global head of strategic investment advisory group at JPMorgan, New York, and a co-author of the white paper, said in an interview.
Speaking hypothetically, he said if a fund had a portfolio invested 100% in global equities, the Asia ex-Japan weighting would be 10.5%.
An institutional investor can gain exposure through public equities, private equity or infrastructure. The increase would be funded from other developed markets, said Mr. Masih.
But others say this position will be a tough sell to U.S. institutional investors, who tend to shy away from making regional strategic bets.
Fred Dopfel, managing director and head of the client advisory group at Barclays Global Investors, San Francisco, said the idea makes sense, “but there is a significant risk of underperforming ... in the short and intermediate term.”
JPMorgan officials' argument in favor of a strategic investment in Asian emerging markets lies with the region's increase in productivity levels. Asian governments have made investments in infrastructure, technology and research and development to promote a more productive work force, which ultimately will lead to higher price-to-earnings ratios and higher long-term equity valuations for Asian stocks, said Mr. Masih.
China, for example, plans to increase the amount it spends on research and development by 21% per year over the next three years, increasing R&D spending to 2.1% of gross domestic product by 2010 from 1.5% of GDP last year, according to the report.
Between 1996 and 2006, China's productivity has increased an average of more than 7% per year; India's, about 4.5%. By contrast, productivity levels in the U.S. increased about 1.9% per year.