Is the Asian Economic Growth Story About to be Tapered?

Is the Asian Economic Growth Story About to be Tapered? September 18, 2013 Investing in international and emerging markets may involve additional ris...
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Is the Asian Economic Growth Story About to be Tapered? September 18, 2013

Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. In addition, single-country and sector strategies may be subject to a higher degree of market risk than diversified strategies because of concentration in a specific industry, sector or geographic location. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

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

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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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

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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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

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 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: