The rally in Asian stocks hasn’t dulled my bitcoin pain

American readers of this column are stretching my patience. Those who rushed into bitcoin exchange traded funds (ETFs) after my column in January are bombarding me with photos of new cars, villas in the Bahamas and expensive bum-lifts.

So thanks a tonne Financial Conduct Authority for denying us British investors the spoils of a two-thirds gain in prices. Hopefully, you own bitcoin via other means. But my portfolio only holds regulated securities available to all — so crypto I have none.

And will continue to do so even after the FCA opened the way on Monday for bitcoin-backed exchange traded notes (debt securities that trade like ETFs) to be sold in the UK. Only professional investors can buy them.

What a joke. I’m allowed to punt penny stocks or be all-in on a spread bet which could go to zero. Regulators are fine about contracts for difference purchased with 30 times leverage. A bitcoin ETN, however? “Ill-suited for retail customers.”

I digress, though. Because as well as a bunch of emails about newly-bought yachts (these particularly grate as mine continues to smoulder) yet more readers cite my column of February 9 which promised that Asia would be the next topic for review.

Sorry about that. I was busy ignoring the UK Budget and researching lithium power banks. And it’s lucky I was. Over the past two months my iShares MSCI EM Asia ETF is up 11 per cent.

It’s almost as if it knew it was for the chop, as I have despaired of my woeful Asian fund for years. Over the past five, for example, the second worst performing ETF in my portfolio — UK equities — has twice the total return.

I was running out of patience but kept convincing myself to hold on. So what now? Is this latest rise just another dead cat bounce? After all, Asian stocks have made similar gains half a dozen times in the past five years — to no avail.

First, I need to remember what is in this fund. I’ve invested in the region for decades and still the MSCI Asia indices baffle me. Did you know they include India? Even the Asia Pacific index, which doesn’t gel with my atlas.

Likewise, MSCI EM Asia, the index my ETF tracks, is supposed to include emerging market countries only. So no Japan, Singapore and Hong Kong. Fair enough — indeed the absence of Japan is why I chose this fund.

Why then does it have a 20 per cent weighting in Taiwan or 16 per cent in South Korea, both with outputs per capita equal to Japan’s? Not that I’m complaining. It means I’ve enjoyed the recent artificial intelligence bonanza, thanks to Taiwan Semiconductor.

In fact, the latter at 10.6 per cent is by far the biggest stock in the ETF — almost twice the size of number two. Which is? Actually, it is another fund: the iShares MSCI China A ETF.

I haven’t a clue what four out of the top 10 China A companies even do. Never heard of them — although I do know the biggest by a factor of three makes baijiu, a liquor

Golly, I had no idea. So what’s in that then? Well, China A shares are large and mid-cap names listed on the Shanghai and Shenzhen exchanges which are available to foreign investors via the “stock connect” with Hong Kong.

To be honest, I haven’t a clue what four out of the top 10 China A companies even do. Never heard of them — although I do know the biggest by a factor of three makes baijiu, a liquor so popular that Kweichow Moutai’s market cap is four times Diageo’s.

After that, Samsung Electronics is my Asia fund’s third-largest holding at 5 per cent. Its share price is more or less flat since 2018. Tencent and Alibaba at 4 per cent and 3 per cent respectively are next. I dare not look at those charts — ugh!  

Then it drops away fast in terms of size. However, I am pleased to see the presence of two Indian companies — Reliance and Infosys — in the top 10. I wasn’t exactly sure if I had much skin in the country’s latest bull market.

All of which reminds me of the breadth and variety within these Asia funds. The more I think about it, my usual practice of analysing aggregate valuation ratios in the hope of understanding what is going on under the hood is ridiculous.

Really, the only approach that even half makes sense, or doesn’t take a million years, is to compare today’s valuation with the past — so long as the index hasn’t changed too much. Likewise if we want to make a relative call, say against a S&P 500 fund.

On the latter, I’m not impressed that the MSCI EM Asia index hasn’t been this cheap relative to the US on a price-to-book basis since the dotcom boom. I want to make money in absolute terms. That it is less expensive than something expensive doesn’t wash.

More annoying is that Asia valuation ratios are no longer cheap relative to the past — over any period and based on forward earnings or book value. The rally has raised the numerator while China has hammered the denominator.

Meanwhile, tracking flows in and out of Asian equities is silly, as I’ve also written previously. Foreigners do put more money into the region when their own markets are doing poorly, according to Refinitiv data, but only the price at which they trade matters.

Finally, I have yet to see proof that any catch-all economic indicators are worth following. The fund is too diverse. That said, a weaker greenback does seem to buoy returns, according to a Bank for International Settlements paper I’ve quoted before.

Where does that leave us? Asian stocks look a poor bet versus history, and it is 50:50 if the dollar can help. Together that’s crappy odds. I’d rather own bitcoin.

The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__