Harry Markowitz, a pioneer of modern portfolio theory, once described diversification as the only free lunch in finance. The result of Britain’s Brexit referendum may mean that Markowitz’s advice is more important than ever. No-one will really know the full economic impact of the referendum result for years to come. However, investors are likely to face a period of economic uncertainty as the UK government negotiates Britain’s exit from the European Union. This uncertainty could generate instability and volatility in UK equity markets. Investors may consider diversification across Asian and Indian markets in order to generate more stable, less volatile returns.
Asian markets would arguably be more sheltered from the consequences of Brexit than stocks in Europe. Moreover, Asian companies generally have greater exposure to economic growth in India, China and other developing nations like Turkey and South Korea. Jim Rogers, who co-founded Quantum Fund with financier George Soros, believes that while London was the place to be in the 19th century and the US in the 20th, the 21st century belongs to Asia. So let’s explore how investors can gain exposure to economic growth in Asia and perhaps reduce the volatility of their portfolio as the UK negotiates its withdrawal from the EU.
Why hunt for High Flyers?
Before analysing individual companies, let’s take a moment to understand why India and Asia provide bountiful hunting grounds for High Flying stocks, which are typically good quality companies that have strong share price momentum.
High quality companies are usually profitable firms with a strong balance sheet, wide profit margins, and a track record of consistently growing sales year after year. In coming decades, it is expected that Asian companies will grow their sales as a result of surging consumer demand. Indeed Terry Smith, CEO at Fundsmith Emerging Equities Trust, believes that the ‘biggest predictable development in emerging markets is the emergence of a consuming class’.
Some economists predict that the consuming class in the developing world will grow by approximately one billion people between 2010 and 2020. This trend would of course be advantageous for consumer stocks - retailers in particular. Smith notes that ‘in the Developing Economies we can find retailers in markets where the potential growth is so great that we do not need to worry about the ability to grow outside their national boundaries.’
Furthermore, many companies in the consumer…
