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The Sweet Spot
by Michael Nairne,
Today?s low interest rates and lackluster stock valuations suggest portfolio returns going forward will be modest. Investors in search of higher return opportunities need to consider small-company value stocks. We explore how this asset class can improve portfolio performance for long-term, patient investors and deal with its risks and limitations.
Asia Insights from EM Analyst Conference
Many tend to focus on China and India, the two rising Asian economic powers, and there are reasons why we believe both, which are currently among the top five largest economies in the world will likely be among the top three in 2020. Land and labor costs remain cheap in China. In addition, the country appears to have a competitive edge in terms of work ethics, relatively flexible labor laws and excellent logistics. India?s strength is in its young, growing and increasingly well-educated population, which is fluent in English. This has enabled the country to become a leader in IT consultancy.
Inflation: Coming to a Store Near You
by Jesper Madsen of Matthews Asia,
During the past decade, consumers (and central bankers) in developed economies have grown accustomed to the cost benefits of outsourcing their manufacturing to Asia. This resulted in lower prices at the cash register, which in effect gave households in the U.S. greater purchasing power. The outsourced manufacturing model has historically hinged upon the availability of relatively cheap labor, undervalued currencies, access to preferential tax treatments and ongoing improvements in productivity. However, it has become apparent that this model may be under some strain.
Asian Emerging Markets Will Grow on You
A year has passed since Saturna put staff on the ground in the heart of Kuala Lumpur, Malaysia, at the offices of our subsidiary, Saturna Sdn. Bhd. As expected, we have gained valuable insight into the emerging markets of Asia. We find the key to unlocking the opportunities these markets have to offer is an understanding of the intersection of market structure, demographics, economic growth, and asset allocation. Our analysis of trends in these four areas reveals an economic environment with favorable prospects for long-term growth.
Bruce Berkowitz on the Exceptional Value in the Financial Sector
by Robert Huebscher,
Fairholme's Bruce Berkowtiz, US stock-fund manager of the decade, discusses his large position in the financial sector and why he believes the big bets he is making do not amount to Russian roulette. He also comments on his recent nomination of former Florida Governor Charlie Crist to the board of St. Joes.
Breakfast with Dave
by David A. Rosenberg of Gluskin Sheff,
The Treasury market retains a nice bid here and equities now look a bit wobbly or at least engaging in a pause. European bourses are in the red column for the most part and Asia was mixed with Japan, Hong Kong, and Korea posting gains but China and India were both clocked for a 0.9% and 1.6% loss, respectively. Even though China raised reserve requirements by a half-point again, the oil price is receiving support from concerns over the spread of social unrest in the Middle East towards Libya and Bahrain.
A Market Story
by Robert J. Horrocks of Matthews Asia,
It is not the headline rates of growth in Asia that excite me?it?s the profit-making opportunities within those economies that are necessary to sustain reasonable rates of growth and support the changing lifestyles of Asian households. And that, I hope, is a sentiment with which both the old and the reformed Scrooge might embrace.
Weekly Asia Update: Postcard from China
by Xin Jiang of Matthews Asia,
Automation is one of the many possible solutions for China. There is plenty of room for China to catch up with its industrialized Japanese neighbor. China?s current level of industrial automation is comparable to that of Japan in the early 1980s, based on the percentage of computerized machine tools, the market size of the core machinery components needed for factory automation, and the level of automation in vehicle manufacturing.
Descending a Mine Shaft in the Kazhakstan Steppes
Kazakhstan is becoming increasingly important to us as an investment destination. It has vast natural resources such as oil, gas, copper, uranium and a host of other minerals. As a result of the billions of dollars pouring into the country to develop those resources, we believe Kazakhstan has become the economic engine for Central Asia. We have been investing in both the petroleum and mining sectors in Kazakhstan, and the purpose of this visit was to take a closer look at the mining sector.
Here We Go Again!
by David A. Rosenberg of Gluskin Sheff,
Market sentiment is as overly optimistic now as it was pessimistic at the July-August lows. Eurozone fiscal deflationary shock. Anti-inflation policy restraint in emerging Asia. Widespread cutbacks at the state and local government level. Debt ceiling issue triggers major rounds of market volatility. Tax breaks that are temporary tend to have marginal economic impact with few multiplier impacts, hence GDP revisions will likely be to the downside post-Q1. Another downleg in home prices undercuts confidence and spending (with around two years? supply of total vacant inventory backlog).
The End of the Asian Bull Market
by Robert Huebscher,
A broadly diversified emerging market investor would have earned nearly 12% annually over the last five years, far outpacing investors in the US and other developed markets. Over the next five or even ten years, investors relying on emerging economies will not be as fortunate, however, according to Louis-Vincent Gave, CEO of the Hong Kong-based research and investment management firm GaveKal.
Looking Back at a Year of Policy Mistakes
by Michael Lewitt,
As we approach the end of 2010, the global economy remains captive to a boom-and-bust cycle resulting from years of pro-cyclical monetary, fiscal and regulatory policies. With very limited exceptions, the same policies that contributed to the 2008 financial crisis remain in place. The only difference is that government balance sheets are far more leveraged than they were heading into that crisis.
A Notable Year of Emerging Market Growth
I view 2010 as a year of economic resurgence. Many emerging markets recorded strong GDP growth as they continued to recover from the impact of the 2008 financial crisis. In several cases, robust domestic consumption, government expenditure and intra-regional trade offset weak external demand from developed markets. This led many countries in Asia and Latin America to return to pre-crisis growth levels much faster than expected. China and India were among the world?s fastest-growing major economies during the year, with China overtaking Japan as the world?s second-biggest economy.
Year-end Letter to Clients: Investment Advice from Winston Churchill
by Dan Richards,
For the past 18 months, my draft letters have been designed to balance some of the extreme pessimism among many investors with an objective, positive outlook - the draft year-end letter for 2010 continues with that goal. In it, I borrow from Winston Churchill's insight into the difference between optimists and pessimists.
Postcard from Australia
by Elizabeth Dong of Matthews Asia,
Thanks to its abundant natural resources, Australia managed to escape the recent global financial crisis largely unscathed as it has enjoyed a wave of industrialization from emerging Asian countries. Economic ties between Australia and Asia have broadened from the resources sector to other sectors. Australian financial companies have formed joint ventures and subsidiaries in emerging Asia. One Melbourne-based insurance firm I met with on my recent trip entered into an agreement with the largest bank in China to jointly develop and distribute life insurance products there.
Allentown
by Bill Gross of PIMCO,
The global economy is suffering from a lack of aggregate demand. In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive. Unless developed economies learn to compete the old-fashioned way ? by making more goods and making them better ? the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space.
Tensions Resurface on the Korean Peninsula
by Michael Han of Matthews Asia,
North Korea remains a constant thorn in the side of Asia and an irritant to regional peace?this much is clear to South Korea, Japan and the U.S. Perhaps this is also increasingly clear to China, which has thus far given the impression of being too tolerant of the North's actions.
Ned Davis - Still Positive on Stocks
by Robert Huebscher,
Just over a year ago, Ned Davis correctly forecast a continuation of the cyclical bull market in stocks. In February of 2008, he foresaw that year's market upheaval, and a year later he predicted the rally that began in March of 2009. Today, Davis is moderately bullish on stocks, as long as the Fed maintains its policy of quantitative easing.
7 Things to Watch for as 2010 Ends
by Isbitts of Emerald Asset Advisors,
The cyclical (1-4 year) picture is getting better for U.S. stocks, and even better in the Emerging and Frontier markets. Put us in the camp of people who believe the Fed is too focused on fighting deflation, and at some point in the next half a decade, we will pay for it dearly. Perhaps the most remarkable trend will be the rise of the "Emerging Nations," particularly those in Asia.
The Korean Discount: Getting What You Pay For?
by Jesper Madsen of Matthews Asia,
South Korea can be a frustrating place for investors. The country?s companies exhibit such potential and yet many of them trade at a significant discount to their peers both globally and in Asia. My last visit to Korea reminded me of why equities of Korean companies are often not priced in line with the value they create. There have been many attempts to rationalize the discount, with explanations ranging from threats posed by an unpredictable North Korea to the cyclicality of many Korean businesses. However, I believe the issue of corporate governance merits most attention.
Weekly Commentary & Outlook
The stock market succumbed to profit taking last week. The reasons are many, but revolved around a poor earnings report from Cisco Systems, a growing skepticism of the Fed?s announced plan to goose the money supply, and finally what the mainstream media is reporting as a rather disappointing trip to Asia by President Obama even as he tried to put his electoral defeat here at home behind him.
How Modern Is Your Portfolio Theory?
by Direxion Funds,
After 58 Years, is there Another Way to Conquer the Efficient Frontier? In the past, active or "tactical" investment management referred to jumping in and out of stocks and bonds - market timing. With the introduction of sophisticated funds that help the masses harness the power of institutional managers and alternative asset classes and strategies, today, tactical management may help to renovate your portfolios - and help you retain and attract assets.
Waiting for Superman: The Fate of Teachers? Unions
by Charlie Curnow,
In 'Waiting for Superman,' the new documentary film about the shortcomings of American public education, director Davis Guggenheim argues that, in order to compete with rival school systems in Asia and Europe, the U.S. must rein in its teachers unions and embrace the free market principles of private schools and privately managed charter schools. Is this a fair assessment?
Effects of Quantitative Easing on Asia
by Teresa Kong of Matthews Asia,
While the U.S. intends to stimulate its domestic economy with quantitative easing, the actual effect of QE has been to turbo-charge emerging markets, especially the markets of Asia. There is some concern that short-term portfolio flows or 'hot money' could cause sharp price volatility, and we will continue to monitor these effects and their implications on Asia.
Four Critical Investment Themes for the Next Decade
by Robert Huebscher,
Four investment themes will dominate market behavior over the next decade, according to Martin Murenbeeld, the chief economist at DundeeWealth Economics, a Canadian investment manager and financial advisor. Investors, he said, would be wise to overweight gold and other commodities.
Convertible Strategy Q3
Recent earnings growth stems from the economic leadership of developing countries from Asia to Latin America. When those economies soften, the recent improvement in earnings will be called into question. Meanwhile, with interest rates already at rock bottom, equity prices are even more susceptible to future earnings hiccups. The most profitable investment approach over the next several years will therefore be to reduce risk following periods of strong returns, and add risk only when markets have weakened sufficiently.
Developed Markets and Capitalism in Crisis
by Robert Huebscher,
We are not in a globalized world today, according to Ian Bremmer. "The state is back," said the 40-year old president and founder of Eurasia Group, a political consulting firm. Both in the U.S. and throughout the world, governments are exerting their influence through regulation, trade restriction, subsidies, and bailouts, and are threatening the nature of free markets.
Evolution of the Asia Bond Market
by Teresa Kong of Matthews Asia,
One of the most profound developments in the history of Asia's capital markets has been the deepening of the domestic bond markets over the last decade. The largest Asian issuers can now diversify their funding sources across both international and domestic currencies. While China's bond market is the largest in Asia outside of Japan, it remains largely inaccessible to most foreign investors. Korea's local currency-denominated bond market is the next-largest at just under U.S. $1 trillion, making it the single-largest bond market readily accessible to offshore investors.
Global Market Commentary
Inflation, which has heated up in countries like Brazil, India, Indonesia and many others, will eventually make its way to the U.S. and Europe. Attractive areas for investment include Chinese consumer stocks and currencies, stocks and bonds of growing countries in Asia and Latin America, U.S. stocks and gold. The Japanese yen is a short. Japan's quantitative easing, when combined with the QE going on elsewhere, provides a strong impetus for price increases in commodities, gold and stocks.
A September to Remember
by Ron Surz,
In his quarterly market analysis, Ron Surz notes that September has historically been the worst performing month for US stock markets, losing 1% on average over the past 85 years, while the average return in the other 11 months was a positive 1.3%. Not so this September. Surz reviews global market performance and provides his thoughts on peer group analysis and target date funds.
Postcard from Japan: Before the Dawn
by Andrew Foster of Matthews Asia,
Matthews Asia portfolio manager Andrew Foster recently returned from Japan, where he met with companies from a variety of industries. As in past trips, many of these companies seemed to be resting on their laurels, even as present growth was flagging. During this most recent visit, however, a subset of companies in different industries seemed to share a realistic outlook, combined with a sense of urgency to improve performance. Each of these companies cited the strength of the yen as a key factor that would allow them to execute overseas acquisitions, especially in the U.S.
Liquidity Flowing into Asia and Western Latin America
Liquidity will flow into the Asian region raising consumer spending, stock prices and currency values. In the following countries: India, Indonesia, Malaysia, Thailand, Singapore, and China much new liquidity will enter. It will be in the form of foreign direct investment and investment money moving into stocks and bonds. With the exception of China, which is being singled out for a trade battle by the U.S. Congress, all of these countries will see their currencies rise and their economies grow.
What are Essential Factors for Japan to Return to its Status as the Rising Sun? (Part 2)
Japan's immigration policy needs to loosen up to help lower labor costs. In addition, the government needs to reduce spending and taxation so that local small and medium-sized enterprises can grow by expanding into the rest of Asia and to business in places such as China, India and Indonesia. That's because small and medium-sized enterprises are a crucial part of the economy that help to create new business and enterprises. In order for those to flourish, the Japanese government must reduce its role in the economy.
Too Soon to Call for Asian Decoupling
Even without a double-dip, weak U.S. and EU recoveries will cause export-dependent Asian economies to grow below their 2003-07 trends in the coming years. Nonetheless, widening growth differentials with the G7 countries and healthy public- and private-sector balance sheets - along with rising incomes and expanding middle classes - will drive economic growth and foreign investment in Asia and increase intra-Asia and EM trade and investment.
Redefining Decoupling
by Robert J. Horrocks of Matthews Asia,
During the second half of 2007, market commentators debated over 'decoupling' - the idea that Asia may somehow be immune to the vicissitudes of the Western economic cycle. Markets are now worried about slowing momentum in the recovery of the developed world. Matthews Asia chief investment officer Robert Horrocks explores decoupling in the current economic environment.
Cheap Labor Helps Southeast Asia Compete with China, But It Won?t Be Easy
by Team of American Century Investments,
Labor disputes in China and other emerging market countries have been catching global media attention. As employees in the low-cost workshops of the world fight for higher wages and better working conditions, the longer-term outcome will be better standards of living and rising disposable incomes in emerging market countries. These changes hold positive implications for many global-based companies' present and future growth. A growing consumer class with 'buying power' will certainly be beneficial.
Postcard From Korea
by In-Bok Song of Matthews Asia,
During her recent trip to Korea, Matthews Asia research analyst In-Bok Song met with several companies that have been making consistent preparations for the next leg of growth in their core businesses. Though their success remains to be seen, there were a few commonalities in their approach. The most apparent one is their entry into China. Another is structural reorganization, which aims to generate synergies within related business and to strengthen core competitiveness. These efforts in Korea's underlying economy help define the foundation for the country's sustainable economic growth.
Malaysia, Truly Asia?
by Jesper Madsen of Matthews Asia,
Malaysia will need to proceed further down the path of liberalization in order to ensure that it stays relevant in an ever more competitive environment and truly grow with the Asian continent. Fortunately, over the past few years, policymakers have scaled back parts of the country's affirmative action system and placed emphasis on the expanding the services sector - both of which are long-term positives that could bode well for Malaysia relevance, not just as a tourist destination, but for long-term capital appreciation.
Postcard from Inner Mongolia
by Winnie Phua of Matthews Asia,
Inner Mongolia, not to be confused with Mongolia, is a province in northern China recently visited by Matthews Asia research analyst Winnie Phua. Two dairies in the region command 60 percent of China's dairy market. Unlike most other agricultural industries in China, the dairy business underwent consolidation fairly early on. Over the past decade, it has witnessed rapid production growth of more than 20 percent each year thanks to industry consolidation efforts and increasing milk consumption. These efforts provide insight into how other consolidating industries in China may fare.
Postcard from Indonesia
by Taizo Ishida of Matthews Asia,
On paper, Indonesia has made big strides, with annual GDP growth of more than 5 percent in the last several years - including in 2008 when most markets suffered. The country's stock market has also been the best-performing market in Asia since late-2008. But if you stand in the middle of Jakarta you somehow don't get that sense. Indeed, there are still challenges to overcome: infrastructure woes, the country?s widespread poverty and a government lacking checks and balances.
How the Other Half Looks
by Nouriel Roubini of RGE Monitor,
The global adjustment process has been delayed. In order to support growth and income generation, the over-saving investment- and export-driven nations - China, emerging Asia, Germany and Japan - continue to look to the overspending countries following an Anglo-Saxon model. There is a risk of a weak recovery of global aggregate demand relative to supply, which could contribute to deflationary pressures. As such, the recovery will continue to be multi-speed and rocky, exit strategies will remain uncoordinated and the risk of policy gridlock is high.
Active Managers Add More Value in Bull than Bear Markets
In this guest contribution, Jane Li of FundQuest argues that both active and passive investing have their strengths and weaknesses; it depends on the market segment in question and on the economic climate. Active managers tend to add value in bull markets, but their value is shakier in bear markets.
Musings on Asia
The popping of both the Chinese and Japanese bubble economies will lead to higher interest rates. The Japanese government will probably not be able to intervene in the economy for much longer, and so rates in that country will rise and there will be little they can do about it. China's government, meanwhile, seems to be mulling another multi-hundred-billion-dollar stimulus over the next few months. The Chinese government's actions are thus the wild card that will determine the duration and the magnitude of the bubble's pop - the longer they intervene, the direr the consequences will be.
Postcard from the Shanghai Expo
by Andrew Foster of Matthews Asia,
Two weeks ago, Matthews Asia portfolio manager Andrew Foster attended the 2010 World Expo underway in Shanghai. The theme of the expo, 'Better City, Better Life,' is intended to demonstrate the benefits of better urban planning, smart growth and a stronger emphasis on the environment. Its message was juxtaposed, however, against the reality that much of the country's growth has been fueled by construction and heavy investment. And while the expo does illustrate China's first steps toward openness, fewer than 2 percent of event participants came from abroad.
Emerging Asia's On/Off Switch
by Nouriel Roubini of RGE Monitor,
In 2009 and the first half of 2010, low interest rates and an uncertain global outlook led to strong, volatile capital inflows into some of Asia's most promising economies. Policymakers in these places - which include, among others, Hong Kong, Taiwan, Singapore, South Korea, Indonesia and India - need to tighten monetary policy sooner rather than later. New inflows from the rest of the world might prove problematic, but at present low or negative real interest rates seem to be fueling speculative investment by domestic players, and that too is a dangerous dynamic.
Niall Ferguson on Japan, China, and the US
by Dan Richards,
Harvard's Niall Ferguson is arguably today's leading economic historian. In part two of this interview, Ferguson explains why he fears the future is bleak for Japan, why China may someday be the leading global superpower, and what all this means for the US. We provide a video and a transcript.
Navigating Fears of the Bond Market
by James Pressler of Northern Trust,
The need to keep the bond market happy while implementing often far-reaching fiscal reforms is most acute across Europe, where the outlook is for weak real GDP growth into 2011 ? albeit with significant variations between countries. Conversely, the recoveries in Asia and in the Americas have effectively eliminated fears of sovereign defaults but now concerns over economic overheating will dominate. The U.S will eventually have to address its own public debt overhang, but for now is enjoying a temporary safe-haven status.
Changing Channels: Asia's Shifting Media Mix
by Elizabeth Dong of Matthews Asia,
A combination of rising consumer demand, emerging technology, market forces and gradual regulatory reform is transforming Asia?s media landscape. Research analyst Elizabeth Dong explores the ways in which China?s publishers and local governments are pushing for reform, and India?s traditional media marketplace has been transformed by private entrepreneurs and foreign players.
The Phantom Recovery
by Peter Schiff of Euro Pacific Capital,
Once the euro finally stabilizes against the dollar, commodity prices should resume their rise, especially oil. Normally, the uncertainty created by the disastrous oil spill in the gulf and the resulting moratorium on deep-water drilling would have sent crude oil prices skyrocketing. However, fears of a global slowdown, euro weakness, and general risk aversion have held prices in check. As Asia continues its growth and Europe regains its footing, there should be a delayed surge in oil prices, which will put yet another obstacle on the road to US recovery.
Spotlight on Southeast Asia
The GDP of Southeast Asia is about the same size as India, and within two decades, the region is expected to have a larger and younger population than Europe. It is also a major exporter of soft commodities like palm oil, rice, tapioca, coconut oil, and rubber. Vietnam is one of the key frontier markets in Southeast Asia, and valuations there are among the cheapest in the world. Indonesia's extensive resources and large population put it in a favorable position to attract investments and establish a strong domestic economy.
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