41c in every dollar: Why J.P.Morgan's Alex Treves is excited on Asia - and what investors are getting wrong

"There's a lot to be quite excited by at the moment," said Treves. "The first thing is AI, and then just generally expenditure on things, defence, shipping, supply chain diversification, energy self-sufficiency."

"That's very positive for Asia and emerging markets. We make things and sell them to the rest of the world."

And this strong position is supported by further headwinds for the sector, according to Treves - a resumption in the downtrend for the US dollar and a desire from investors to move out of expensive US equities. 

"The entire investment world is already quite fully invested in US assets," said Treves. "And US equities had a prolonged bull market. They got relatively expensive. They were certainly widely owned."

That has prompted investors to look elsewhere, and Asia is shaping up as an obvious beneficiary.

"Where do they invest their marginal dollar if it's not in the US? And I think there's a lot of traction in emerging markets in Asia-Pacific equities," said Treves. 

"So if we think year to date where we've seen significant flow: we've seen Japanese investors, institutional and wholesale, into Japanese equities; we've seen Taiwan capital into Taiwan equities. We've seen Korean institutional into GEM. We've seen Australia ETF flows into GEM. We've seen wholesale in Hong Kong, Taiwan, mainland into income and tech products."

AI and Asia

It's hard to argue against the fact that AI remains the key driver in many parts of the Asian equities market, even if recent worries in the US and elsewhere have raised the familiar questions about the sustainability of AI capex.

"What the Korean memory stocks PE multiples are telling you is that investors have worried that we're at peak earnings," said Treves. "But we're pretty confident across the board that the hyperscalers are going to keep spending." 

And if that view is correct, Asia will continue to reap much of the benefit, regardless of who emerges as the winner in the AI arms race, he says.

"For every dollar they spend, 41 cents goes into our pockets. The great thing is that we can be totally agnostic about which LLM or AI tool or hyperscaler succeeds because whoever spends money, Asian tech hardware businesses are the beneficiaries of that."

What investors are getting wrong 

Asia and emerging markets continue to carry an undeserved reputation for relative underperformance. But that view suffers from a recency bias that doesn't paint a true picture of the region's potential for returns, says Treves.  

"There's a generation of investors who might have 10 years of experience in the industry, which means they're moderately experienced, but they've never seen a prolonged Asian bull market or period of outperformance," Treves said. 

"And a bit like black swans back in the day, until they've seen it, they don't believe it exists."

"The advantage for me is I've been doing this for 31 years and I've seen 8, 9, 10-year periods where Asia does consistently outperform the US. So to some extent, I think we might be going through a bit of a re-education period where younger investors need to reacquaint themselves with some of what's exciting in our geography."

Part of that process is also overcoming other biases and perceptions, most notably our tendency to favour our home market. 

"Diversification is always your friend and everyone nods when I say that," said Treves. "But the interesting thing is that Australian investors nod about diversification being your friend and they've got huge home country bias. And then Chinese investors nod, they've got huge home country bias and Japanese investors, etc."

And that bias flies in the face of sensible investing strategy, in which diversification isn't just about risk mitigation but maximising opportunities. 

"No country has got a monopoly on good business models," said Treves. "So it might be that Korea, for example, has got world leading memory stocks, but if you want logic, you go to Taiwan. So Taiwan and Korea between them have got an amazing tech hardware complex. But if you want fast growing banks on a huge population basis, you need to go to India." 

"And if you want to figure out, 'well, what does a really world-leading internet business model look like', which might go from being somewhat a risk from AI to being able to monetise that, well, maybe you go to mainland China. And if you want a really sophisticated set of resource stocks, you probably go down to Australia."

JPMAM and Treves are also supportive of a barbell-type approach to portfolios, with a specific focus on equity yield and covered calls. 

"The reason I like equity yield is you get the best of two worlds," he said. "You get the yield, but you also have the chance to compound earnings up over time if you buy the right stock, which I think is pretty magical."

But in an environment in which risks feel heightened, it can also be useful to lean on covered calls as a way to benefit from the potential volatility, says Treves. It is something employed by the JPMAM Equity Market Development Programme (EQDP), which surpassed US$1 billion in AUM in eight months.