Is the Asian Economic Growth Story About to be Tapered? September 18, 2013
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The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect the presenters’ current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles.
The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Please see important disclosures at the end of this presentation. Do not give, show or quote to any other person. This document is not for public distribution and is for institutional/professional use only and has not been registered with, or approved by, and regulatory authority in any jurisdiction. © 2013 Matthews International Capital Management, LLC WC038
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Today’s Speakers and Moderator Asian Growth and Income and Asia Dividend
Asia Focus
Asia Growth, Emerging Asia and Japan
Robert Horrocks, PhD CIO and Portfolio Manager
Kenneth Lowe, CFA Portfolio Manager
Taizo Ishida Portfolio Manager
Asia Small Companies
Lydia So, CFA Portfolio Manager
Jodi Morris, CFA, CFP® Moderator
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Is the Asian Economic Growth Story About to Be Tapered?
YES—cyclically in the short run, it is being tapered NO—this cyclical period will not impact Asia’s long-term growth
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Key Takeaways for Today’s Roundtable
CONCERN
SHORT-TERM IMPACT
LONG-TERM IMPACT
Tapering and Monetary Policy
Some impact
Neutral
GDP Growth Expectations in Asia
Moderating
Acceptable and expected
Debt Levels in Asia
Rising, but not necessarily a negative
Differentiate “good” from “bad” credit growth
U.S. Recovery, Rising Corporate Margins; Falling Corporate Margins in Asia
Portfolio investment flows into Asia have stalled
Does not mean swapping EM (including Asia) for DM (U.S. and Europe)
Current Valuations
May factor much of short-term concerns in
May offer long-term investors somewhat of a “floor”
“What is your timeframe? What do you mean by growth?”
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Emerging Markets Have Grown Asian countries have achieved “Economic Take Off” GDP per capita relative to the U.S. (2010) 1.2
U.S.
HONG KONG SINGAPORE
1.0
0.8
TAIWAN SOUTH KOREA
JAPAN
0.6
0.4
Europe
MALAYSIA THAILAND CHINA
U.S. and Canada Latin America
0.2
Asia INDIA
Middle East/Africa
0.0 0.0
0.2
0.4
0.6
0.8
1.0
1.2
GDP per capita relative to the U.S. (1980)
Source: Angus Maddison, MICM Do not give, show or quote to any other person. This document is not for public distribution and is for institutional/professional use only and has not been registered with, or approved by, and regulatory authority in any jurisdiction. © 2013 Matthews International Capital Management, LLC WC038
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Determinants of Long-Term Growth
GROWTH = INVESTMENT (Savings) + LABOR (Demographics) + PRODUCTIVITY (Skills, Education, Technology)
Asia has in spades
Asia is mixed
Asia is learning or copying
Expect Asia’s potential long-term growth will be higher than the U.S. and Europe, but in the short run: U.S. and Europe are a long way below potential; Asia is about at potential U.S. and Europe can grow in the short term by increasing demand; Asia needs to increase supply
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Don’t Expect Asia’s Short-Term Headwinds to Lead to a Long-Term Rut Current accounts and inflation across Asia Current Accounts (% of GDP) 25%
TIGHTER MONEY―FX APPRECIATION
SOME ROOM FOR FISCAL STIMULUS 20% Singapore
15% Taiwan
10%
Vietnam Malaysia South Korea Philippines China Japan Thailand Australia
5% 0% -5%
Hong Kong Pakistan Sri Lanka
Cambodia
-10%
Bangladesh Indonesia
India
-15% -20%
LOOSER MONEY―FX DEPRECIATION
-25% 0
FISCAL AUSTERITY NEEDED 5
10
Consumer Prices (Year-on-Year Change) Sources: The Economist and Bloomberg. Data as of 9/17/13 Do not give, show or quote to any other person. This document is not for public distribution and is for institutional/professional use only and has not been registered with, or approved by, and regulatory authority in any jurisdiction. © 2013 Matthews International Capital Management, LLC WC038
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Debt Levels Across Asia Much Lower Than Pre-Asian Financial Crisis Gross external debt to GDP (1996 versus 2011) Total Gross External Debt to GDP 70%
60%
50%
40%
30%
20%
10%
0%
1996
2011
China
1996
2011
India
1996
2011
1996
Indonesia External public debt/GDP
2011
Malaysia
1996
2011
Philippines
1996
2011
Thailand
Non-public Source: World Bank
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Asian Valuations Suggest Emphasis on Short Term Pressures Over Long Term Opportunities Asia ex Japan Valuations (September 1993 – September 2013) Forward P/E Ratio
P/B Ratio
25.0
4.5 4.0
20.0
3.5 3.0
15.0
2.5 2.0
10.0
1.5 1.0
5.0 Asian Financial Crisis
0.0 Sep 93
Sep 95
Sep 97
SARS Outbreak
Sep 99
Sep 01
Asia ex Japan Forward P/E
Sep 03
Global Financial Crisis
Sep 05
Sep 07
Asia ex Japan P/B
0.5
Sep 09
Sep 11
0.0 Sep 13
Linear (Asia ex Japan Forward P/E)
China
Hong Kong
India
Japan
U.S.
Forward P/E
9.8x
12.5x
11.8x
14.2x
15.3x
Dividend Yield (%)
2.6
2.8
2.1
1.8
1.9
The forward price per earnings ratio (“Forward P/E”) is calculated by dividing the market price per share by the expected earnings per share for 2013. Forward dividend yield is based on consensus dividend per share for 2013 divided by share price. Forward P/E and forward dividend yield table data calculated as of 09/13/2013 using data from FactSet and are forward looking. There is no guarantee that forward P/E and/or forward dividend yield will be realized. Sources: FactSet Research Systems, MICM; Asia ex Japan data as of 09/13/2013 Do not give, show or quote to any other person. This document is not for public distribution and is for institutional/professional use only and has not been registered with, or approved by, and regulatory authority in any jurisdiction. © 2013 Matthews International Capital Management, LLC WC038
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What Causes a Debt Crisis?
A number of factors differentiate “good” credit growth from “bad” credit growth:
Current account position External borrowings Inflation rates Standards of bank supervision Longevity Pace of credit expansion Starting credit/GDP ratios
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Domestic Credit to GDP has Risen Over the Last Five Years Domestic Credit Provided by Banks Relative to GDP 400% 2007
2012
350% 300% 250% 200% 150% 100% 50%
North America
OECD Members
European Union
Japan
Hong Kong
Thailand
South Korea
China
Australia
Malaysia
Vietnam
Singapore
India
Philippines
Indonesia
0%
Source: World Bank Do not give, show or quote to any other person. This document is not for public distribution and is for institutional/professional use only and has not been registered with, or approved by, and regulatory authority in any jurisdiction. © 2013 Matthews International Capital Management, LLC WC038
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Asian Financial Systems Generally Liquid and Self Funding GROWTH IN LOANS AND DEPOSITS AND RESULTING LOAN-TO-DEPOSIT RATIOS, 2007 – 2012 Cumulative Deposit Growth 2007 – 2012 180%
Bubble Size: Loan-to-deposit ratio at end of 2012:
150%
Red: >100% Orange: 80% - 100% Green: