AIA: Not The Best Time To Make Concentrated Bets On Larger Asian Markets

Dominant Asian large-cap ETFs, such as the iShares Asia 50 ETF (AIA), are highlighted as over-concentrated in China and Taiwan (74% of assets) and IT/financials (64%), leading to stretched valuations and elevated political risk despite strong recent performance. The article advises investors to underweight these large-cap exposures and instead consider undervalued, more diversified Southeast Asian markets like the Philippines, Malaysia, and Indonesia, which trade at a significant discount (11-14x earnings) and offer superior long-term growth potential.

Analysis

The current investment landscape in Asian equities presents a duality of strong past performance and emerging risks, particularly within dominant large-cap vehicles like the iShares Asia 50 ETF (AIA). While AIA has outpaced the broader iShares MSCI Emerging Markets ETF (EEM) by over 40 percentage points in the last decade, its structure now poses significant concentration and valuation risks for H2 2025. The ETF's portfolio is heavily skewed, with 74% of its assets allocated to China and Taiwan, and 64% concentrated in the Information Technology and Financials sectors. This is exemplified by Taiwan Semiconductor alone constituting 23% of the fund's assets. Following a robust performance in H1 2025, which saw Chinese markets run up over 20%, valuations in these dominant markets now trade at a premium, leaving them susceptible to a pullback on any negative economic or geopolitical news. In contrast, emerging Southeast Asian markets such as the Philippines, Malaysia, and Indonesia offer a compelling alternative, trading at a significant discount with price-to-earnings ratios around 11-14x. These economies are projected to grow by 4-6% and feature more diversified industrial structures, although investors should note that country-specific ETFs can also have high concentration in their top holdings and that markets like Thailand face heightened political risk.

Key Decisions for Investors

• Investors should review exposure to broad, large-cap Asian ETFs like AIA and consider reducing positions due to significant concentration risk, with 74% of assets in China and Taiwan, and stretched valuations following a strong H1 2025.
• Consider a tactical rotation from overvalued Chinese and Taiwanese large-caps towards undervalued Southeast Asian markets like Indonesia, the Philippines, and Malaysia, which offer more attractive valuations at 11-14x earnings and stronger diversification.
• For more granular exposure, constructing a portfolio from a basket of single-country ETFs, such as the Vaneck Indonesia ETF (IDX), could be a prudent approach to mitigate the concentration risks inherent in broad regional funds.
• Monitor key risks associated with this strategy, including rising political instability in Thailand and the cyclical nature of the semiconductor industry, which remains a key driver for the Taiwanese market.