I was pleased to read a very persuasive article in the August 12 edition of Barron’s, written by Matthews Asia strategist Andy Rothman, in which he outlines the case for investing in shares of companies that are capturing growth in the rapidly expanding Asian consumer economy. This is an investment theme that we have been committed to for several years, written about often, and is now coming into its own.
This long-time veteran of Asian markets makes a number of interesting observations:
- Although the biggest boost from urbanization is behind it, China accounts for more global growth than the U.S, Europe, and Japan combined. Yet it’s also a source of endless investor apprehension. This is a nice set up for value investors.
- In China, real income growth is 7% this year, and real retail sales are up 9% in the first half. On top of that, consumer sentiment is positive, household debt is low, and household savings rates are high.
- People have been predicting China’s imminent collapse for years, and a central tenet is that an economy based too much on exports and investment isn’t sustainable. China has made tremendous progress in restructuring toward a more consumer-oriented economy. In 2017, services and consumption will exceed manufacturing and construction for the sixth straight year. Services rose from 43% of GDP in 2007 to 54% last year, confirming the rebalancing of the country’s economy.
- Household debt to GDP was recently 43% for China, compared with 79% in the U.S. and 88% in the UK. Housing prices in Tier 1 Chinese cities are overheated, but these major cities represent less than 10% of new home sales. The broader real estate market is more attainable. Also, Chinese banks, much like the U.S. housing market in the 1950’s and 1960’s, require between 20%-30% cash down – keeping leverage to a manageable level. Less debt burden keeps the Chinese consumer more buoyant.
- Although the Trump administration is building a case to restrict Chinese imports, only 18% of Chinese exports come to the U.S. The Chinese consumer economy will be largely unaffected by any unfriendly aspects of the Trump agenda.
The growth of the Chinese consumer economy is an extremely “investable” trend. Yet there are similar trends in other Asian economies as well; India and Indonesia to name a few. Owning a broad and diversified basket of growth companies selling into Asian consumer markets is a very prudent move in our view. In terms of investment sectors, when recommending diversified Asian equity funds we like to see significant exposure to technology, consumer discretionary, and health care.
It is hard to know which country or region will generate the highest equity returns at any given point, and Latin America has been the big global winner in 2017 thus far. Accordingly, it is our practice to pair our recommended Asian equity funds with more broadly allocated international funds and high-quality globally diversified stocks. The specific use of this strategy in your portfolio depends on several factors and should be reviewed thoroughly before moving forward.
These are the opinions 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. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Asset allocation and diversification strategies do not assure profit or protect against loss.
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