Asia: risk-reward haven for EM equities

ASIA offers investors the opportunity to profit from companies operating in what remains the region of the world with the fastest pace of economic growth. Many Asian economies are benefiting from deep structural reforms, supportive monetary policy and fiscal support targeted at infrastructure development. Asian equities' relatively attractive valuations coupled with weak commodity/energy prices also provide favourable tailwinds.

After years of tracking closely with their emerging markets peers, Asian equities have more recently moved ahead, so it's worth examining what's behind this decoupling. During the 10-year period between 1998 and 2007, performance of the MSCI Emerging Market (EM) and MSCI AC Asia ex-Japan index were very similar; they basically moved in lockstep with each other.

In the wake of the Global Financial Crisis (GFC) in 2008, the correlation between the two benchmarks remained high. However, starting in 2012 we began to see a break-down in the strong correlation trend. (See chart).