Value for the risk
EVEN if international fund managers are not making much money in Asian equity markets, there is good reason to be exposed to the region from the point of view of risk.
This is the view of economists Ian MacFarlane and Kenrick Ramlochan at HSBC Asset Management.
They say Asian markets overall are only loosely related, both regionally and internationally, by correlation.
In portfolios, Asian markets are plugged together, almost like an asset class.
But the low intra-market correlations make a strong case for exposure.
''Even if some markets are subdued, there will always be some parts of the region which will be performing,'' say the economic duo.
The low regional correlation reflects, among other things, the wide disparities between stages of economic development.
The low correlation with international markets also highlights the benefits of diversification for balance across several financial centres.
In addition, the strong negative correlation between United States bonds and Asian markets argues particularly forcefully for diversification out of the US equity market.
In terms of equity markets, only Singapore has a relatively high correlation with the Standard and Poor's 500 index.
Over the long term, there is a danger that as markets in the region develop, their correlation grows with other developed markets.
The growth in the utility sectors in regional markets - which can make up huge portions of total market capitalisation - also is a challenge to the HSBC argument as they threaten to affect overall market correlation performance.
Listing of public utilities and the privatisation programmes within Asia suggests that this may become an ongoing contributor to the instability of the correlations and that better results could be obtained if the impact of these was stripped out, says HSBC.
The benefits to international portfolios of exposure to the low intra-regional market correlation present in Asia, combined with Asia's low correlation with developed markets, are large, says the bank.
