Why APAC requires a holistic approach: Franklin Templeton

Fast-growing economies. Diversified markets. Vibrant companies. These are some of the attributes that attract global equity investors to the Asia-Pacific region (APAC), and they remain all the more compelling as the world enters the era of policy uncertainties, supply-chain disruptions and multi-polar geopolitics.

Templeton Global Equity Group shares investors’ strong conviction in the APAC markets but believes in a more nuanced approach to deliver differentiated long-term results.

In our view, this should entail fully harnessing the diversity of APAC equities to identify the full spectrum of regional opportunities – from local champions to globally leading companies across both emerging markets (EMs) and developed markets (DCs).

Just as importantly, investors should also benefit from having a multi-pronged portfolio that combines the growth potential of high-quality companies with the defensiveness of dividend stocks. History shows that this “quality + yield” approach has led to more stable and superior outcomes compared with other investment styles in APAC.

To invest in APAC is to invest in the world’s fastest-growing region – still valid even as the world grapples with the challenging new realities of Trump 2.0. With global industries and supply chains still adjusting to the aggressive tariff and trade policies of US President Donald Trump, the risks of an economic slowdown or even recession have become elevated.

APAC is nonetheless likely to continue to outpace the world in economic growth, with gross domestic product (GDP) forecast to expand by between 3.8 per cent and 3.9 per cent for 2025-27 versus 2.6-3 per cent global growth over the same period. From a top-down perspective, the region may offer viable alternatives to investors seeking growth in a turbulent world.

The economic vibrancy of APAC reflects the collective power of a large universe of EMs and DMs, each with its distinctive characteristics and structural drivers.

From the inflationary tailwinds, interest-rate normalisation and corporate governance reforms in Japan, the supportive government policies and improving economic fundamentals in China, and the critical role of South Korea and Taiwan in the global information technology value chain to the opportunities arising from supply chain reconfiguration that Southeast Asian manufacturers are positioned for, our research has uncovered a vast combination of growth catalysts across APAC.

On the ground, these structural drivers are similarly catalysing growth for a diverse combination of industries and companies. Among them are domestic-facing businesses that are strong proxies for the long-term trends of growing middle-class wealth, premiumisation of consumption and digitalisation of services.

These may include consumer and internet companies in China and India. Some are beneficiaries of domestic policy tailwinds, such as Japanese banks and industrial companies, which are positioned for the corporate capital expenditure (capex) recovery spurred by economic normalisation.

At the other end of the spectrum, APAC is home to many heavyweights that play a dominant role on the global stage. Some examples include car exporters in Japan, computer and electric vehicle producers in China, semiconductor manufacturers in Taiwan and South Korea, as well as mining conglomerates in Australia.

The universe of APAC companies comprises far more than just vulnerable manufacturers and exporters grappling with US tariffs – it’s a full ecosystem with distinct theses and opportunities that can manifest variously as macro and policy conditions evolve, potentially benefitting from different parts of the economic cycle.

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APAC constitutes a fertile ground rich with ideas and companies to construct a diversified portfolio. It offers a spectrum of opportunities to build diversified exposure to value, quality, growth and income stocks – but investors can only benefit from these opportunities with a true APAC approach that explores the region in its totality.

We also believe this is an area where investors may be under-invested. In our experience, we observe that many active and passive APAC solutions adopt a more siloed strategy, often investing either in emerging Asia or Japan separately, but rarely across the region in its entirety.

Data says that such a piecemeal approach to APAC investing may provide lower returns. For instance, the region’s broadest benchmark, the MSCI All Country (AC) Asia Pacific Index, recorded annualised gross returns of 11.82 per cent over three years, eight per cent over five years and 6.15 per cent over 10 years, in US dollar terms.

This is ahead of the MSCI AC Asia ex-Japan Index, which delivered 9.72 per cent, 6.82 per cent and 5.76 per cent over the same respective periods.

Looking at index attributions, it can be clearly seen that having exposures to Japan and Australia – markets that are absent from the MSCI AC Asia ex-Japan Index – is consistently a major driver for the relative outperformance of the MSCI AC Asia Pacific Index.

Therefore, it is our belief that only a diversified “whole of APAC” portfolio can unlock the full potential of the region. Such a portfolio should encompass the growth dynamics unfolding in the emerging and developed economies of APAC.

It can also offer the advantage of a broader set of bottom-up opportunities, capturing exposures to both domestic-facing and globally important companies. In the uncertain world of Trump 2.0 and possibly beyond, we believe this remains a viable way to deliver sustained and defensible returns amid changing economic and policy conditions.

Ferdinand Cheuk is a portfolio manager and research analyst at Templeton Global Equity Group