WASHINGTON: Whatever happened to Asia? Last time I looked, 3.5 billion people lived there -- three times as many as in North America and Europe combined. Asia is the fastest-growing part of the world and already accounts for one-quarter of all global economic output. Yet Asia gets almost no respect from US investors.
Part of the problem, of course, is Japan. Over the past decade, its economy has stagnated, and its stock market has disintegrated. The Nikkei 225, Japan's benchmark index, has dropped 30,000 points, or 78%, from its 1989 peak.
Then, there are the “Tigers” -- smaller Asian countries that turned aggressively to capitalism 20 years ago and that generated vast enthusiasm among investors in the mid-1990s. But that boom went bust in 1997, practically destroying the currencies of South Korea, Thailand and Indonesia.
As for China: Its stock market is almost a black box. Foreign investors are welcome to insert money blindly and hope that more comes out the other end. But there are minimal legal protections, poor financial reporting and little transparency.
So it is hardly a surprise that many US investors have concluded that international diversification means Europe – and maybe even a little Mexico and Canada.
What about so-called “international'' funds? They're just “European funds in disguise,'' says Mark W. Headley, president of Matthews Asian Funds in San Francisco.
So while investing in Asian stocks is not easy, concentrating solely on companies based in Europe and the US could be a big mistake. “The radical bias against Asia has no rational justification,'' Headley says.
In fact, there may be a decent argument for ignoring European stocks as a specific asset class for diversification purposes, but none at all for ignoring Asian stocks.
Since 1995, Europe stocks and US stocks have been moving, first up and then down, in tandem. Their mathematical correlation has increased, so they no longer offer the balance that's so important in a portfolio. As a result, my advice has been simply to buy the best companies, whether they are headquartered in Europe or the United States.
But Asia is another matter. The movement of Asian stocks often bears no resemblance to the movement of US stocks – a condition that can smooth the ride of an investor who owns both. Compare Matthews Pacific Tiger (MAPTX), an excellent regional fund, with Vanguard Index 500 (VFINX), the largest fund that mimics the US benchmark, the Standard & Poor’s 500-Stock Index.
In 1997, the Asia fund lost 41% while the US fund gained 33%; in 1999, the Asia fund gained 83% while the US fund rose only 21%; in 2001, the Asia fund gained 8% while the US fund lost 12%.
Headley sees two good reasons to invest in Asian stocks. The first is that “you don’t know what the next five or 10 years will bring.’’
In other words, since the future is unknowable, you should make sensible investments all over the lot.
You’ll have some winners and some losers, but overall and over time, if the world economy grows, then stock prices should rise smartly. He says that roughly 12%, or about one-eighth, of your stock holdings should be Asian.
Second, Headley contends, Asia, with an economy outstripping Europe and America, is the right place to be for the 21st century. Yes, the collapse of 1997 devastated many Asian markets, but “they have been digging themselves out of the rubble,’’ he says. South Korea, notably, has changed its economic policies for the better.
At the corporate level, says Headley, “Korean companies never used to care about the bottom line, but they have switched to the US business model.’’ Returns on equity (that is, the rate of profit earned on the shareholder’s investment) have risen to around 15% in Asia – outside Japan, that is – but, meanwhile, valuations are cheap. Price-to-earnings (P/E) ratios average around 10, or less than half the current US level.
“Corporate Asia has been working hard on its act,’’ says Headley, “and has not gotten credit for it.'' That’s good news for investors – strong companies are being ignored.
But if you want to invest in Asia, it's folly to do it yourself, unless you want to buy giant Japanese auto and electronics stocks – such as Canon Inc (CAJ), Sony Corp (SNE), and Toyota Motor (TOYOF) – which appear more correlated to US and European large-caps.
Instead, buy a good mutual fund. One that dampens the risk of Asian stocks by owning only dividend-payers is Matthews Asian Growth and Income (MACSX), which has produced positive returns in each of the past five years and an average annual return of 15.6%, with relatively low risk. There is, however, no exposure to Japan.
Headley figures that investors will not shun Asia for long.
“Asia tends to attract money when the markets are hot,’’ he says. In other words, investors try to time their entry, and it’s almost always too late.
“The tragedy of our lives,’’ he adds, “is that people throw money at you after the stocks have already run up.’’ – LAT-WP
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