China’s deteriorating economy is raising fears of a global recession. However, some investors believe the China slowdown story is focusing attention on investment opportunities in other Asian markets. Morgan Stanley downgraded the iShares MSCI China ETF (MCHI) from overweight to equal weight in early August, citing lower earnings growth expectations and structural challenges. The country’s recent economic data largely came in line with expectations. Wells Fargo’s chief economist said, “If China were still a periphery economy, the rest of the world would not be as concerned about China’s economic outlook.” can have a significant impact.” Jay Bryson wrote in a recent note. Opportunities in Japan Japan currently stands as a “particularly attractive” investment play, according to Scott Ladner, chief investment officer at Horizon Investments. The third-largest economy now has the largest international weight in his portfolio as he moves its influence away from China. “There’s still a lot of stimulus in the pipeline in Japan. And we think that means Japanese corporations could have pretty favorable conditions for earnings for the next six to 12 months,” Ladner said. Morgan Stanley also has a bullish short and medium term outlook on Japan. “Often maligned as an ‘old’ economy, Japan is the fastest growing DM economy in our scope and has become quite trendy,” Global Chief Economist Seth Carpenter wrote in a note on June 26. Even the Bank of Japan has changed its policy. Yield curve control, a tailwind for corporate earnings for Japanese equities, has reduced appreciation, he said. Investors can gain access to the Japanese market through the iShares MSCI Japan ETF (EWJ), which has an expense ratio of 0.5% and more than $13 billion in assets. Although the ETF posted a total return of -3.6% in August, it is up 13% year to date. The recent appreciation of the dollar against the yen could also make Japanese equities an attractive investment play. Other Opportunities in Asia-Pacific Besides Japan, South Korea and Taiwan are the other Asian markets best positioned to withstand and recover from lower growth in China, said Carlos Asilis, chief investment officer at Glovista Investments. Despite the three countries being top trading partners with China – and Korea and Taiwan starting out to be notably export-dependent economies – Asilis believes the rest of the Northeast Asian countries will remain untouched. “Taiwan, South Korea and Japan are the least vulnerable, as they were sources of foreign direct investment, and their investment through China was high on the capital account,” Asilis said. Ways to play this space include the iShares MSCI South Korea ETF (EWY), the Franklin FTSE South Korea ETF (FLKR), and the iShares MSCI Taiwan ETF (EWT). The iShares South Korea and Taiwan ETF each has an expense ratio of 0.58%, while Franklin Templeton’s FLKR has an expense ratio of 0.09%. To be sure, other markets in the Asia-Pacific region face downside risks from a slowdown in China. Asilis highlighted Australia as the most risk-averse economy due to its high commodity exports and infrastructure investment in China. “If you’re in the Asian emerging universe, there’s no way to completely decouple from China,” Ladner said. “But we’ve heard of companies moving the supply chain to India, Vietnam, Indonesia [which] are competitive. China’s move down to some extent benefits … those other areas that were just overlooked.” Investors are bullish on semiconductor business in the sector, noting that Taiwan is already a major player in the market. Japan and South Korea are also making efforts to accelerate growth in semiconductor manufacturing.The countries could also benefit from a growing rift between the US and China that could shift the global supply chain in their favor.