Chinese Growth Expected to Boost Asian Markets Long-Term
Andrew Leckey

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Car horns blare at the busy intersection. Shiny late-model luxury cars cram the wide streets. The "walk" light is on, but a pedestrian quickly steps back onto the curb to avoid an aggressive taxi turning right.

Meanwhile, a motorcyclist cruises his bright-blue bike down the middle of a sidewalk crowded with people.

Nobody bats an eye. After all, it is expected that progress will be demanding.

While Asian markets have been slowed this year by global worries and remain volatile, dramatic Chinese growth is expected to drive them ahead longer-term. That makes them hard to resist for investors, especially with lower stock prices, despite worries that China's economy and real estate market have come too far too fast.

"When I was in China in the mid-1990s, it was hard to imagine that you could have your own car," recalled Richard Gao, portfolio manager for Matthews China Fund and Matthews Pacific Tiger Fund. "Yet last year China became No. 1 in total auto production in the world, thanks to tremendous growth in income and a growing middle class, with domestic auto penetration still low at around 5 percent."

Asian firms benefiting the most from rising consumption throughout the region will be in consumer staples, consumer discretionary, financials and information technology, predicted Gao. Companies such as South Korea's Samsung Electronics Ltd., LG Display Co. Ltd. and Hyundai Motor Co., once deep debtors, are now money-making world leaders.

Led by stocks such as China firms Dongfeng Motor Group Co. and Zte Corp. in telecommunications, the $2.3 billion Matthews China Fund (MCHFX) has a 12-month annualized return of 19 percent and a five-year annualized return of 21 percent.

The $3.6 billion Matthews Pacific Tiger Fund (MAPTX), with one-third of its stocks in China, has a 12-month annualized return of 21 percent and a five-year annualized return of 13 percent. It is less volatile than the Matthews China Fund due to diversification into countries such as India, Indonesia and Singapore.

"China is increasingly important to the entire Asian region as it migrates from being a low-cost, early-stage assembler of exports to the West to becoming a consumer of products and services itself," explained Colin Chickles, the Hong Kong-based portfolio manager of Fidelity Southeast Asia Fund.

This rising consumer nation helps the bottom line of regional companies such as coal producers in Thailand, banks in Singapore and suppliers to big companies that do business in China, he said.

"My expectation is for China's economic growth to continue at a fast pace, with that growth becoming less dependent upon what happens in the developed markets of the U.S., European Union and Japan," said Chickles.

The $1.5 billion Fidelity Southeast Asia Fund (FSEAX) has a 12-month annualized return of 12 percent and a five-year annualized return 10 percent. It features stocks such as China Mobile Ltd., China Construction Bank Corp., China Life Insurance Co. Ltd. and South Korea's Samsung.

Though backed by deep teams of managers and analysts, all these funds invest in volatile emerging markets that can provide stellar upturns or sudden losses on unpredictable events. Not for the timid, they should represent no more than a modest portion of a personal portfolio.

"Investing in countries like China and in Asia overall can mean very high volatility with swings of 30 to 50 percent," acknowledged Gao. "If you take a longer-term horizon and believe Asia and China have long-term growth potential, however, that will lower volatility longer-term."

Chinese consumer companies have a distinct advantage over foreign companies doing business there that focus only on wealthier areas such as Shanghai and Beijing, he added. They have much deeper roots with the larger nationwide distribution and scale to take advantage of massive population in the middle and western portions of that vast nation as well.

"The future is bright for China and emerging Asia, though the Japanese market has been a disappointment for the better part of two decades," said Bill Rocco, senior fund analyst at Morningstar Inc. in Chicago. "The Chinese presence is only going to get bigger and the world is increasingly linked, as you can see by how Greece of all places is impacting markets all over the world."

Most diversified foreign stock funds have more than 15 percent of their portfolio assets in Japan and another 10 percent or more elsewhere in Asia, said Rocco. That means investors should examine holdings in their current funds before investing further, he said. And, of course, there are funds such as those noted that target specific Asian regions and countries.

Much of the current speculation about China centers on whether it will revalue its yuan currency, which the U.S. and other countries consider too low in value.

"If the Chinese yuan appreciates again, it will have big implications for Chinese exporters already facing labor shortages and rapidly-increasing wages," believes Chickles. "On the other hand, a rising yuan would help Chinese consumers buy more by cutting the cost of everything imported."

Trade, currency, political and ideological differences will continue to affect the U.S. and China relationship, with added roadblocks thrown in from time to time from places like Europe. But despite stops and starts along the way, the unrelenting growth prospects of Asia are expected to drive forward.

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