As I write this note President Trump and the president of China, Xi Jinping, are preparing to meet at Mar-a-Lago on April 6th and 7th. This is on my mind not just because we continue to recommend an appropriate allocation to Asia for those who are investing for the long term, but it also marks the first meeting in what may become a new and different season in terms of global trade.  Will this new season benefit investments in Asia or limit our global exposure? What is the enduring trend that will create the best long run return?

The S&P 500 has gained roughly 6% so far in 2017, yet it is easy to find Asian-focused investments which are up 9 to 12% year to date. That out-performance has come in the face of a shift of trade policy here in the US -and Asia lagged the domestic markets in the past 3 to 5 years when it enjoyed an open trade policy.  So what is driving returns over the past three months and will this out-performance last? For an informed opinion on this question I would like to point you to the March 2017 commentary written by Robert Horrocks, PhD, the Chief Investment Officer at Matthews Asia, in which he states – “I believe that growth depends on the desire and ability of people to work hard, learn and better their standards of living. This desire remains unchecked in Asia. Opportunities, too, regardless of any trade issues, remain plentiful in the domestic economies.”.  He backs that opinion up by citing 3 factors he believes are leading to sustained long-term high GDP growth rates:

  • Asian economies are now driven by internal demand rather than only exports and correlations between the US economy and Asian economies (as measured by the markets) have dropped considerably
  • The savings rate in Asian countries is up to 2.5x the US savings rate which allows for more investment leading to higher rates of growth
  • The valuations of Asian companies compared to the expected returns are significantly lower than what one needs to pay for domestic companies.

The domestic demand investment strategy is to invest in companies that provide goods and services to the citizens of countries in which wages are rising faster than inflation. We think this is an investment theme that should provide superior long-term results. As that theme continues to be represented in Asia, we believe that an appropriate allocation to Asia should be part of the long-term investor’s portfolio. We will experience volatility along the way but the fundamental trends point to long-term success. 

This is the opinion of Charles Dear and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested in directly. Past performance is no indication of future results.