Mat Port tthews As tfolio Ma sia Webc anager Ro

Transcription

Mattthews Assia Webccast
Porttfolio Maanager Rooundtablle
Ju
une 11, 20114
withinn Asia, and therefore seeing tthe importance of taking an
Parrticipants
activee, selective appproach to investting in the regiion.
®
Jodi M
Morris, CFA,, CFP , Seniorr Vice Presiden
nt of Matthewss
Internnational Capitaal Managementt
You fa
fast forward to June and now we have seen emerging
markeets, many in Assia, perform weell, which has bbeen leading
Robeert Horrocks, PhD, Chief Inv
vestment Officcer and
Portfoolio Manager, Matthews Asiaan Growth and
d Income
Strateegy
many to ask have wee passed the tuurning point forr emerging
markeets and for Asiaa? In our time ttoday, we’d likke to share our
perspeective on the prrospects for Assia and how thhat translates
Teressa Kong, CFA
A, Portfolio Maanager, Matthew
ws Asia
Strateegic Income Sttrategy
into acctively-manageed Asia investm
ment portfolioss.
Joininng me today aree four Lead Maanagers from thhe Matthews
Yu Z
Zhang, CFA, Portfolio
P
Manag
ger, Matthews Asia Dividend
d
and C
China Dividend
d Strategies
Taizoo Ishida, Portffolio Manager, Matthews Asia Growth,
Emerrging Asia and Japan Strategiies
Asia IInvestment Teaam and they reppresent a subseet of the 15
Asia ddedicated equitty and fixed inccome strategiees we offer heree
at Mattthews. They'ree part of a mucch larger 37-peerson
investtment team whhich manages coollectively oveer US$25
billionn, exclusively iin Asia, and investing in secuurities across
Presentation
develooped, emergingg, and frontier markets. The tteam, as a
wholee, spends a trem
mendous amounnt of time on thhe ground in
Jodi M
Morris, CFA,, CFP®—Moderator
Goodd afternoon, thiis is Jodi Morriis, and I'd like to
t thank you alll
for paarticipating in today’s
t
mid-yeear 2014 Matth
hews Asia
Portfoolio Manager Roundtable.
R
We
W entered the year
y with a lot
of invvestor uncertain
nty about emerrging markets and
a while
conceerns stretched from
f
Russia an
nd the Ukraine to Argentina,
Asia w
was certainly out
o of the mix, and in particular, most focuss
on Chhina, with conccerns ranging from
f
slowing GDP
G
growth to
strainns to its financiial system. We also witnessed
d, entering
Asia w
with that sole ffocus of findingg companies w
who will benefitt
from tthe long-term eevolution that w
we see in the reegion, and so
whethher it’s a bond oor an equity strrategy, whetheer it’s a regionaal
strateggy or a countryy-specific one, a small-cap strrategy or a
multi--cap one, the em
mphasis is alw
ways the same ffor members off
the teaam. It’s a long--term focus onn bottom-up seccurity
selectiion. We’re nott going to coveer all the strateggies today, but
let mee introduce ourr panel of four and also the strrategies that
they’rre aligned withh.
2014,, investors favo
oring developeed markets overr emerging
markeets, and also a growing affiniity for frontier markets. For
my coolleagues and I at Matthews Asia
A who havee been a part off
manyy of these conversations, I willl say that we were
w seeing a
silverr lining. Investo
ors were concluding that in th
he end all
emergging markets are
a not created equal and they
y were better
Kong; Teresa iis the Lead Maanager of the
To kicck off, Teresa K
Matthhews Asia Strattegic Income S
Strategy. With gglobal debt
benchhmarks structurrally under alloocated to Asia, we believe it’ss
really important to cconsider a dedicated Asia fixeed income
allocaation, and this sstrategy is quite unique in thaat it invests in
recoggnizing the diffferences in marrket dynamics for Asia and
1
MATTHEWS ASIA WEBCAST: PORTFOLIO MANAGER ROUNDTABLE | June 11, 2014
both corporate and sovereign debt across Asia, in both local and
and its potential impacts on markets, and also talk about Asia’s
U.S. dollar currencies.
frontier markets and at that time, we will filter in your
questions that we've heard previously to the webcast and also
Robert Horrocks is Matthews’ Chief Investment Officer and he
during the event.
is also the Lead Manager of the Matthews Asian Growth and
Income Strategy. That strategy is designed to be the least
With that, let’s get started, and Robert, as I like to do, I will
volatile of Matthews’ core equity strategies and it invests in
start with you. Back to this question, we have seen a turnaround
equities with solid dividend streams, but will also invest in
in emerging markets broadly, including a number of markets in
convertible bonds and may even hold some straight debt.
Asia, what are your thoughts on this?
Yu Zhang is Lead Manager of the Matthews Asia Dividend
Robert Horrocks, PhD, Chief Investment Officer
Strategy as well as the China Dividend Strategy. Both of them
I think for me, the first part of this year there are three elements
are going to focus on total return and they achieve that by
or three themes that I'd highlight. One is the theme of
investing in companies that pay, but importantly also grow,
stabilization, the other is the valuations in the markets, and then
their dividend streams.
the third is what I'd loosely call reform., I've just got a few
comments about each of those three, but let’s start off with
Finally, Taizo Ishida; Taizo is the Lead Manager of the
stabilization now, which the most obvious example is the so-
Matthews Asia Growth Strategy, which has the broadest
called fragile five (Brazil, South Africa, Indonesia, India, and
investment universe of all Matthews’ strategies, investing in
Turkey), and as we went into the start of the year, these markets
companies across developed, emerging, and frontier markets.
were getting hit pretty hard.
Now, Taizo also leads our Japan and Emerging Asia Strategies,
and I know in our conversation today, Taizo will address Japan
I think people had in the back of their minds 1994, 1997, which
and frontier markets in his comments.
is fair enough, because you'd had a tapering, you'd had a
tightening of monetary policy, and quantitatively the economic
Finally, as far as the agenda today, we’re going to break up our
environment today is not too dissimilar, externally at least,
60 minutes into three main segments. First, we’re going to
from that in 1997, but the sort of warnings of doom appear to
tackle a few of the key questions about Asia as we approach
have been well overdone and I think the real reason is that
mid-year. With the rebound seen in many of these emerging
internally within those Asian economies at least there are
markets, are we at a turning point for emerging markets and
considerable differences between now and 1997, and they
specifically Asia? We should talk about the China consumption
appear, for the most part, to have been able to restore
story, is that still intact, and we have been asked a lot about
confidence in their markets very quickly. The currencies have
Abenomics in Japan, is it working? Then we will take a break
been allowed to take a little bit more of a strain than they had in
from our key questions and then we’re going to get into some
the past and when you look at their achievements on inflation,
of the Strategies that we manage and I will ask each of the Lead
on controlling credit growth in places like India in particular,
Managers to give us a quick update on the broad Asia Strategy
and in bringing the current account deficits back towards
in which they lead and give us a sense for what's worked in
surplus, they have been remarkably successful.
2014, what hasn’t, and what their thoughts are for the second
half of the year. Finally, we will return to our key questions and
Generally, the conditions that pertained in 1997 for most of the
we will finish up with thoughts on Asia’s political landscape
Asian markets are not there at the moment, with a lot of Asia
©2014 Matthews International Capital Management, LLC
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2
with subdued inflation rates and pretty good current account
which Korea and Taiwan are good examples. There is some
surpluses, but I'd ask Teresa just to weigh in on this and maybe
hint of stabilization both on the macro front, on the capital
give us a little bit more detail.
markets front, and in terms of corporate earnings.
Teresa Kong, CFA, Portfolio Manager
The second thing I'd look at is valuations. You can see the
Yes, sure. A lot of the problems created in the crisis of 1997 in
screen we have here, which is the one that we usually show,
Asia as well as the Tequila Crisis in 1993, they were very much
showing price-to-book and price to forward earnings across the
created by the large external imbalances. A lot of these
region for the last 20 years, and in the box there are some
countries are very dependent on external financing, and today,
comparisons with other parts of the world, and valuations again
things have changed substantially. Most of these countries have
still look reasonable in context of Asia’s own history and
become substantially less on external investors. A case for
versus the rest of the world. Now, we get a couple of questions
example, India still maintains a cap on the amount of foreign
on this. One is does it only relate to these two measures? Well,
participation.
actually, if you look at all sorts of valuation analysis, and it’s
done a composite look at price relative measures: price-to-sales,
Now, having said that, a lot of investors have moved into the
price-to-book, price to cash flow, EV/EBITDA, EV/sales*,
local currency products, so while, yes, external investors are no
Asia is looking cheap relative to the rest of the world across
longer investing in the .U.S dollar denominated debt, there is
these measures. There really is an undeniable valuation
going to be some volatility that is going to be introduced by the
discount versus, in particular, the U.S. and Europe. On price-to-
fact that there’s an increased amount of foreign participation in
book terms and dividend yield, it’s at one standard deviation
these global markets.
levels.
Robert Horrocks
Now, the other question we get asked is that may be true, but in
The other element of stabilization I think that has come through
the Matthews’ strategies you like to focus on the consumer
in the first six months of this year is the earnings picture and
businesses, you like to focus on the domestic demand
this is quite important for the region. You had declining
businesses, and aren't they more expensive than the markets as
margins throughout Asia pretty much constantly for the last
a whole? Well, definitely there is a valuation divergence
three and a bit years, but last year, at least at the EBITDA level,
between those kinds of businesses and the rest of the market,
margins appeared to stabilize a little bit more and even to start
but even if you look at the strategy level, particularly if you
to drift up slightly, so there is some feeling at least that the
look at the income strategies, you're getting on a price-earnings
trend in declining margins has come to an end, and that should
(P/E)* basis a large discount to the U.S. and Europe; on the
bode well for earnings growth if Asia can keep up a reasonable
order of 20% or more, with sales and earnings per share (EPS)*
growth at the sales level. The one big laggard in the region in
growth that although the EPS has lagged what you have seen in
terms of that recently has been Korea, which ought to get a
the U.S. recently, it’s been backed up by a much stronger sales
boost like many other economies in the region if you get a
growth than you'll have seen in the U.S., so in that sense, it’s
turnaround in the U.S. import picture. Just the latest data out of
been a higher quality EPS growth. Then when you look at the
the U.S. suggests that you might be seeing the first signs of an
growth strategies, where the discounts in valuation are either
import turnaround in terms of manufactured imports. That
small or whether valuations are roughly in line with the U.S.
doesn’t help the commodity-producing economies very much,
and Europe, nevertheless, you're getting much faster rates of
but it does help a lot of the Asian merchandising exporters, of
growth and much faster rates in particular of sales growth,
WC041_T
*See page 15 of attached PowerPoint, titled “Index Defintitions
and Glossary”.
3
which suggests that that growth can be sustained over a longer
we await to see what happens in Indonesia, but hopefully
period of time. Even in strategies that arguably are positioned
Indonesia too, has largely been reformist governments that have
differently to the market as a whole, that valuation and growth
come in.
advantage still pertains. Asia, I'd say, so far this year definitely
has a valuation cushion behind it, and what it’s been lacking is
Given all this, how is the Strategy positioned? We remain
momentum.
focused, by and large, on domestic demand. This has been a
little bit more challenging in China and in the very short-term
This brings me onto the third thing that I wanted to chat about
in Japan, but we think it’s domestic demand and the consumers
briefly and that is this idea of reform, which I think people are
that will ultimately be the main beneficiaries of reform.
missing out on a little bit in Asia. They’re focused a lot on
Generally, that has served us well to date.
India, but the difference is quite stark in the responses you had
to the global financial crisis. In Europe and in the U.S., you’ve
It’s been a better 12 months for the growth strategies than the
had a growth in government and you’ve had people focusing on
income strategies. This is not unusual in a period of tightening
the demand side of the equation, how do you stimulate
monetary policy out of the U.S. The initial effect of the tapering
demand? By and large, the demand stimulation outside of
on the income strategy, as I said, I think has, by and large,
Japan, for sure, lasted only very briefly in Asia, and what
dissipated, but going forward, you may well see a pick-up in
you've had particularly with the change of leadership in China,
growth and I still think it’s a sweet spot for the growthier
with that in Japan, with that in India, is a focus on limiting the
strategies and within the dividend strategies, also looking more
scale of government and on supply side reforms. That’s even
at high quality industrials, high quality cyclicals, and those
the case in Japan, which is now investing demand management
companies committed to growing their dividend. It’s probably a
too.
better place to be than in pure high yield positions at the
moment.
What you’ve actually got is a big push to change the internal
economies of the region. This is, in my mind over the long run,
Finally, I would just say that Asia seems to be well placed
it’s the supply side that counts for growth, growth in the
relative to the rest of the world for the long run. So from time to
nominal U.S. dollar economies in the region, and that despite
time we will get an abrupt rally in some more distressed
the conventional wisdom that growth doesn’t correlate with
companies, and companies with extremely low valuations, or
market returns. That will correlate with book value per share
slightly less secure balance sheets, for the most part happy to be
growth and dividend per share growth in those markets. So I
positioned in those businesses that will compound and grow
think you're seeing subsidies being cut, labor mobility
over the long run. With that in mind, we continue to add to the
improving internally within countries and across the region,
team here over the last 12 months. We have made five new
improvements in education, deregulating markets, building
hires on the team and we have some more colleagues to join us
better capital systems, pushing for better corporate governance
in the not too distant future.
rules across the region. These are all things that are going to lay
a great foundation for future growth in the economies and I
Jodi Morris
would suspect in corporate earnings as well. Going into the
Thanks Robert. If I could take one point, you mentioned China
year, we had a lot of concerns that there were political elections
and you mentioned even the domestic demand has been a
happening in the region and that causes uncertainty, but when
challenge for China, but do you believe that the long-term
you look across from the changes in China, Japan, India, and
consumption story for China is still intact?
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4
first one was back in 2007 and the second down cycle was in
Robert Horrocks
2011, both of those two down cycles basically were triggered
I do and I think, you know every economy is going to go
by very heavy handed government interventions. However, this
through fluctuations and volatility, and I think in China, as you
time around, the current slowdown in the real estate market in
remove the control of the State or at least the influence of the
China actually has seen very little interference from the
State on the economy and you move to a more free market
government. Instead, it is, by and large, the market forces at
economy, you have the potential to see some of those cycles
work, so we’re talking about a real economy that is slowly
increase. But this is a basic fact of the Chinese economy , and
rebalancing and also the credit supply is not really loosening up
in an atmosphere where everybody talks about consumption-led
much, at least not for the property market. Also, you have a
or investment-led growth in China, the truth is that it’s savings-
pretty severe build-up in the existing housing inventory that
led and productivity-led. China maintains a very high savings
needs to be cleared by providing certain incentives, including
rate. That savings rate I think will fall over time, but it will
price cuts.
remain high relative to other countries in the world, and
productivity continues to grow. It will continue to grow so long
I think so far we are still very early in this cycle and it remains
as China can continue to educate its population and it’s
to be seen as to whether any price cut itself can provide enough
changing the way that the education system works. It’s looking
incentive to spur demand and so that we can go back and have a
for more efficient modes of organization in business. It’s still
relatively shallow down-cycle and recover quickly, just like we
building up the capital stock. All of these things are things that
have observed the last time around. Or actually whether the
propel growth over the long run.
price cut this time will lead to a negative feedback loop to the
extent that it could potentially further exacerbate the downturn
Now, in the short-term, the government is committed to
this time around. That still remains to be seen and given the
slowing the pace of credit growth, which is the one area which I
outsized impact from real estate investment to Chinese GDP
think is of most concern to those looking at China, and I
growth, if you think about both the direct impact as well as
suspect that means that they keep their foot slightly tapping the
indirect impact to both upstream commodity intake as well as
brake in terms of monetary policy for an extended period of
downstream consumption growth; I think the jury is still out. I
time. But as we have mentioned, nevertheless, the underlying
also think the Chinese government, the current leadership, is
theme in China is it’s still a reformist economy. We have a new
less likely to engage in a full-scale stimulus package as their
radical administration in there, privatizing business, deepening
predecessors.
the capital market, and understanding the need to change in
order to meet the demands of the growing middle class.
So, I agree. As Robert just mentioned, strategically the
consumption story in China is still very much intact, as long as
Yu Zhang, CFA, Portfolio Manager
the secular growth story remains so. However, I think over the
Compared to Robert, if I want to take a slightly more tactical
short-term, at least in my mind, I will view that as a slightly
view or approach looking at China, I think for this year, I'm
potential downside risk.
slightly turning more cautious mostly because of what has been
happening in the local real estate market in China. The reason
Jodi Morris
I'm saying this is, we might observe something quite different
Thanks, Yu, so you can see that China is often the topic of
from the past, it’s mostly because if you look at the past two
discussion and debate among members of the team, and I'd say
down cycles happening to the Chinese real estate market, the
one other country that also comes up that’s widely talked about
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is Japan, and it’s one we’re asked about a lot and really now
think we should allow a little more time to see how Abenomics
that we've entered 2014, the question is, is Abenomics
will play out, and remember the last thing the BOJ can do is
working? Taizo, what are your thoughts?
come to the market with more stimulus. So, to me, I consider
us to still be in the fifth or sixth inning of the baseball game.
Taizo Ishida, Portfolio Manager
Well, I guess it’s been sort of up and down. 18 months ago,
Jodi Morris
there was a lot of excitement, that was short-lived. In the last
All right, well, thank you, Taizo. Let’s switch gears a little bit. I
six/seven months, little has happened in Japan. But I think Abe
think that was some important topics to cover to set some
is here to stay. He is not going to go away. I'm pretty optimistic
context to talk about portfolios, so what we’d like to do is just
on what's going on in Abenomics. I think you’ve heard about
get input from the four of you in terms of the four strategies
the Three Arrows and the first one would be the Bank of Japan
that you lead, and why don’t we start with fixed income and it
(BOJ). Mr. Kuroda came in as the new governor of the BOJ, he
we’ll move over across our dividend-orientated strategies and
had the hardest job in Quantitative Easing (QE) and did a great
into our growth oriented strategies. Teresa, in the case of Asia
job bringing down the Yen from 80 to 101. the second arrow,
Strategic Income, can you give us a sense for in 2014 what's
fiscal stimulus, also accomplished a lot. Now, the third one was
worked, what hasn’t worked, and then your outlook for the rest
the most talked about and is gathering the most attention, which
of the year.
is the growth strategy, it hasn’t come out yet. The public has
anticipated this since last October and it is coming out in the
Teresa Kong
next couple of weeks. Abe has to deliver.
Sure, Jodi. In terms of fixed income, as many of you know, the
key dimensions of risk and return are credit currencies and
Now, we’re talking about corporate tax cuts coming. Next, the
interest rates, so let’s break those apart and let’s talk about
focus will shift to foreign direct investment in Japan, because
them in turn.
Japan has been a bit like India, no FDI to speak of. Compared
to China, China has been growing up by $100 billion a year
Let’s first start with currency. We've increased our weight to
from foreign direct investment, whereas Japan hasn’t, so that’s
the Indian Rupee, as well as the Indonesian Rupiah, since the
a problem. Now, the Abenomics is all about defeating 15 years
beginning of the year. Those overweights are really predicated
of deflation. The BOJ is targeted at 2% inflation, which it
on our view that these currencies will continue to strengthen on
hasn’t reached yet. It’s something in between right now, but
an improving current account, as Robert had alluded to, as well
what's encouraging to me, I think a few strategic data points.
as their ability to maintain a relatively sanguine rate of
The first one is GDP number of Q1, recently revised up from
inflation. I think it’s also important to mention that the Chinese
5.7-6.5% I believe consumer confidence is actually much
Renminbi is likely to continue to be very volatile. As many of
stronger—than the May numbers —suggested. I also believe
you know, since the beginning of this year, especially in the
that concerns over the sales tax are overblown. Now, I can't
month of March, the Renminbi took a historical fall, but if you
really say what will happen in the next six to nine months or so,
actually look at how much the depreciation was, it was really
but again if you look at the robust points of data, it is actually
very little; it was 1.4% relative to the U.S. dollar. Not only is
very, very good.
this important, I would argue that it’s actually necessary for a
healthy, liberalizing economy, and the key reasons are as
Corporate profits, are a little high, the market is trading at 1.2
follows.
times price-to-book, which to me is very, very attractive. So I
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6
First, we really we need to get the speculators out of the
Jodi Morris
market. There were a lot of international traders that basically
Okay, well, great. Moving onto the Matthews Asian Growth
had a one-way ride that where they were short low credit
and Income Strategy, Robert, can you give us an update?
currencies and going long the Renminbi just on this expectation
that it was always going to appreciate, which of course the
Robert Horrocks
Chinese authorities want to basically stamp out. I think
Sure, yes. First, just to remind everyone that the purpose of the
secondly it’s also important to change the behavior of the
Growth and Income Strategy is to try and limit the downside to
corporations in China. I can't tell you how many CFOs have
give up some of the upside in order to have a lower volatility
told me that in complete honesty that they really believe that
path through the twists and turns in the markets. Generally
their 10% bond issued in U.S. dollar is really just 5% financing,
speaking, that was harder to achieve through the course of last
because the 5% appreciation in the Renminbi versus the U.S.
year, and at the very beginning of this year. The tapering in the
dollar will really cancel the rest. So that type of expectation
U.S. did have an effect on higher dividend yielding equities
needs to be changed, because in a liberal economy, you need to
across the region, but as Teresa I think pointed out in a webcast
have both appreciation as well as depreciation. Having said
last year, the effects have largely been factored into the market
that, we do expect further volatility in the Renminbi and we
by December, and so turning into this year, we have seen a
think that’s actually going to be very healthy for the further
stabilization of some of the higher yielding equities, and so the
liberalization of the capital markets.
sort of upside/downside capture of the portfolio has normalized.
Having said that, now let’s move onto interest rates for the
In terms of what has done well, what has done badly, generally,
moment. As we increase our weight to Indian Rupee and the
we have done very well in Korean preference shares, and this is
Indonesian Rupiah, we have actually cut our interest rate
just another example of why you shouldn’t just look in terms of
exposures to Thailand and to the Philippines, and that’s really
countries and sectors, but also the individual securities that
based on valuations; the five-year Baht-denominated Thai
you're investing in. A lot of these preference shares were
Government bond yields 3% and the Peso-denominated
trading at discounts of 70% or more to what were already
Philippine Government bond yields only 4%, and while we
cheaply priced equities, and that discount has narrowed
think that both of these economies are doing fine, in the case of
substantially to around about 30% or so, and with that, these
Thailand we think that interest rates actually have more room to
securities rallied quite strongly. Weaknesses in the portfolio
fall because of the current political crisis, and the likelihood of
came largely from some positions in Japan, and in particular an
the Central Bank to add more fuel to the economy by loosening
Australian consumer goods company.
interest rates, we still think that the risks don’t really justify the
returns, and so we felt very compelled to cut those weights and
So far this year, we have done more in terms of adding
increase our weights instead to the Indian and Indonesian
positions in the Strategy. We found some ideas in New
interest rate curves.
Zealand, which is a new geography for the portfolio, Malaysia
and Thailand too, in some of the higher yielding
Finally, on the credit front, we increased our positions in a
telecommunications and other defensive type businesses, and
couple of Indian corporates. They include very large finance
also, finding some ideas in Korea in what I would term as
corporations as well as a State-run electricity company, so
quality cyclicals. This is industrial companies that nevertheless
that’s all the major changes in the portfolio since the beginning
have a high degree of recurring revenue and profits to them,
of the year.
and as I mentioned, Korea has been a bit of a laggard in terms
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7
of earnings growth and we have been able to pick up a couple
last year were in absolute and relative terms were good
of good businesses there at decent prices.
performance contributors to the Strategy, however; the first
quarter especially this year when the overall broad China
One final comment I would make on the corporate bond (CB)
market was being sold off, the valuations of those Chinese
markets, we have had some issues mature already this year, the
companies were taking a knock as well.
percentage in the Strategy is around about 10%, but the good
news is that the issuance has picked up, and it has picked up not
Given what I just mentioned earlier in terms of a slightly more
only in terms of volume but also in terms of the underlying
cautious view on the near-term growth outlook in China,
quality of the businesses that are issuing convertible bonds. The
triggered by a potential slowdown in investments from real
one thing I would say is that they're often fairly richly priced. If
estate related businesses, I think we actually, for the Strategy,
that is the case, we will not participate. We are not going to buy
have been scaling back our China exposure somewhat, mostly
convertible bonds just to maintain some arbitrary percentage of
by trimming down some of the most cyclical exposures in
the Strategy, but if we get a reasonable yield to maturity and
China. Instead, we used the dollar to invest in some of the more
not too expensive an option, then we have participated and we
traditional, what we considered high dividend yield, high
have done so in the industrial sector in Hong Kong most
dividend payouts, more defensive business models in other
recently.
parts of the region, trying to diversify the overall risk profile for
the portfolio, in case we do see a slowdown in China.
There are some signs that CB issuance is picking up.
Japan, interestingly, still remains an attractive place for the
Jodi Morris
Dividend Strategy. I think I mentioned this in the past as well,
Great, and Yu can you give us a sense for Asia Dividend, what
Japanese companies over the years have quite significantly
worked and what didn’t work during the first half and your
improved the balance sheet, and nowadays they are sitting at a
outlook for the latter half of the year?
very strong financial position. Also since 2013, we have been
seeing inflation coming through in Japan. Companies,
Yu Zhang
increasingly, actually are under greater pressure from different
For Asia Dividend Strategy, I think since the last quarter of
stakeholders and also from shareholders in terms of that
2013 through the first quarter of this year, we actually used
management really needs to figure out a way to better utilize
some of the sell-off opportunities in the emerging markets to
the cash sitting idle on the balance sheet.
pick up some names in emerging Asia. We added on a selective
basis a consumer discretionary name in India and also another
Just to give you a very small data point, for fiscal year 2013,
telecom infrastructure business in India. Also, in Indonesia, we
total dividends paid by TOPIX member companies in local
added a financial company at a relatively more attractive
currency terms, actually grew 20% year-on-year. That is not a
dividend yield, when the stock was sold off very aggressively.
small figure for a large market like Japan.
These new additions from India and Indonesia have contributed
quite positively to the performance so far this year.
On the other side, we also see more and more companies
actually are actively raising dividends and also doing more
On the other side, what hasn’t worked for us this year so far, I
sizable buybacks. We have seen a couple of those incidents,
think by and large, our Chinese holdings have become a
even within our small number of Japanese holdings in the
detractor to the performance. Remember, those Chinese names
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8
portfolio, so I think for this year, Japan continues to be a very
Macau name, in late April, because the share price came down
interesting place for us to pick those solid dividend growers.
so much, and I still believe Macau is the place to be. This
baseball term is very popular here and in Macau people think
Jodi Morris
that it is “game over”. No, it is not. It really is not fifth inning
Finally, Taizo, speaking of Japan, can you give us an update on
yet, so I am a bit bullish on their new territory of Macau, called
Asia Growth?
Cotai Central and Hotels are coming up next year, too. I
believe, it is going to be a Chinese the tourism spot, not just for
Taizo Ishida
the VIP hard-core gamblers. It is going to be a huge,
Just sort of starting off on what Yu said, I think maybe I left off
reminiscent of Disneyland. I am really talking about the long-
last time I talked with Japan, though. I think that it is important
term. When I am looking forward, this year and next year, I
to point out Japanese companies are getting better and better all
think on a long-term basis these are sector stocks that I think
the time: more dividend payouts, M&A, more share buybacks
should do well, so we stick to that.
and also there is some push from the government side to
support growth.A new index came out at the beginning of this
Jodi Morris
year called JPX 400, which hones in on companies with solid
Okay, so you guys have been talking about the companies that
corporate governance and fundamentals. So just imagine out of
you're buying. I want to switch gears back again to some of the
the1,700 TOPIX companies, these are not included in the JPX
questions, our key questions, because what we are asked about
400; that is a problem for most of those companies in the
a lot are politics in the region, so there have been elections to
TOPIX.
talk about, political turmoil, so maybe we can start with some
of the most upfront elections in India. Teresa, if you would kick
Okay, now, this reason why I think Asia Growth has substantial
us off and give us some of your thoughts on what the results of
amount in Japan today, 50% of the portfolio is dedicated to
the election mean or don’t mean to investment portfolios?
Japan at this moment, which hasn’t changed since the
beginning of this year. The reasons for this is, I am waiting for
Teresa Kong
Japan to outperform in the second half. , For the past six
Sure, Jodi. I was actually fortunate enough to be in India during
months Japan has been stagnant and India really performed
Election Day, and I would describe the sentiment as one of
well. Because of our positioning, we are a bit behind the index,
euphoria, in the business community especially, it is very
year to date. However, though, I think it is encouraging, we
optimistic and as you can see from the slide here, it truly was a
picked a couple of names in South East Asia, we bought
landslide victory for the BJP Party, which is the Modi-led
Indonesian consumer discretionary names in the beginning of
party. As represented by the orange on the right hand side, the
the year that has done well. We added to the Philippines stock,
country is now predominantly BJP –led, whereas just in the last
which also has done well.
election five years ago, they were very much in the minority.
The ASEAN stocks we own are doing very well, including of
I think one businessman summed it up very, very well in terms
course Thailand. I think the negative contributors have been the
of the significance of this election, which is that for a country
large-cap names in Japan. Also there are those Chinese
where citizens on average make less than US$2,000 on an
companies who did well last year, these are mainly Macau
annual basis, they voted for the hope of getting a job, instead of
casino names or internet names, kind of gave up the other
an ensured hand-out, and I thought that was a really powerful
profits this year so far, but I have to say, we added one more
way of framing the election, but now that the words and the
WC041_T
9
aspirations have been said and that is what got Modi elected. Tt
Perhaps, just a final word on Indonesia, a lot of people are
is going to be the actions and the results that the government
likening the potential election of Indonesia to that of India. I
will be judged going forward, and having said that, I think there
actually feel quite differently, I think this is very much a fight
are going to be a lot of expectations that will need to be
between personalities, rather than policies. If you actually look
fulfilled. So, it is important to be cautious here, and I would
at the policy platforms that the two major candidates are
probably characterize the way we position our portfolio as
actually running on, that is Jakowi and Prabowo, they're very
cautiously optimistic.
much the same So it is very much a fight between personalities,
styles if you will, and we think that the most important thing is
The key reason is this; I firmly believe that a BJP-led
the underlying fundamentals of the companies, and if you look
government combined with a Rajan-led Central Bank is
at the ability of the companies to actually generate cash flow,
actually a very powerful combination. The Central Bank under
we have not seen the downturn. This is actually quite different
Rajan has proven to be very active in managing the currency,
than India and we think that the outcome of the election is not
which is really important, because for a country that is so
going to have a huge bearing on the next few years in
dependent on foreigners for imports like oil, which is such a
Indonesia.
key input to the economy, you can’t be laissez-faire about the
amount of money you have in the coffers to buy these types of
Robert Horrocks
goods, and so having a Central Bank Governor that recognizes
From an equity perspective, I was entering this year hoping that
this and has taken action to ramp up reserves from six months
the political turmoil will create a much bigger buying
to nine months today, I think is really, really important, both in
opportunity in Thailand. I think the markets have been
terms of investor confidence, as well as for the country’s ability
remarkably stable, in currencies, bonds and equities. There
to withstand the next crisis.
have been one or two opportunities. It is now one of the higher
yielding markets in the region, it has a reputation for pretty
Jodi Morris
reasonable corporate governance, so we have been able to pick
Teresa, if you would like to continue on, on your thoughts on
up one or two names, but we certainly didn’t get the abrupt
Thailand given some of the political turmoil we have seen
market reaction that I was hoping for.
there.
Taizo Ishida
Teresa Kong
I spent a little time in Thailand in December, as well as
Sure, from the fixed income perspective, we feel that a lot of
inMarch. So twice over the past several months we have heard
the potential risks are just not priced into the markets. While,
local investors being bullish on what is going. We didn’t
we have seen the last few coups turn out to be very benign,
believe it at the the time because we witnessed a rather slow
we’re not convinced that things will always be the same, and
economy. Our suspicions proved correct on the economy, as
ultimately it is a question about what is priced into the
Q1 GDP numbers were really bad. At this pace, it seems like
valuation, and as I have mentioned, given that there has been no
they aren’t even going to achieve a 2% GDP return this year.
sell-off in the currency and there has been no sell-off in the
However, I think the market in Thailand has been—has been
equity markets, we feel that there is just very little upside left,
surprisingly strong, given the current environment, and this was
and so we have taken down our allocations to Thailand.
something I echoed to what Robert says, we are waiting for that
good opportunity to come down but it hasn’t happened yet.
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Just a little bit on India, I think India is very interesting. For
media, is not really true, so that is what we are finding typically
both India and Indonesia, we want to see more FDI. What
with the frontier markets.
people are finding out is Mr. Modi is pretty friendly with Mr.
Abe of Japan, and so this means that Japanese companies are
This year so far, frontier markets performed remarkably well. I
keen to invest in India. So far, they haven’t done so because of
am specifically talking about four frontier markets in Asia:
such huge red tape and regulations. If Mr. Modi does what he
Bangladesh, Pakistan, Vietnam and Sri Lanka. These markets
says he will do, by cutting through some of the red tape, that
have a very low correlation to the other markets, even
will likely trigger a huge investment boom to India. This may
compared to the other Asian markets, so when alone compared
have important implications for India over the next few years.
to the U.S. market, it is so different. They have done well
because very few foreign investors are in these markets. In
Jodi Morris
Bangladesh, for example, foreign investors made up only 1% of
Taizo, I would love to stay with you, even with the next
the participants are foreigners, just three years ago. Today, they
question on frontier markets, so that is the other thing we have
make up more than 3 or 4%, but still very, very small. So
been asked about a lot, and I think it is investors looking
everything is done by local investors, which has little to do with
beyond emerging markets and a lot of interest in frontier, so
what is going on in the rest of the global economy.
you and your team have been spending a good amount of time
in some frontier markets of Asia over the last few years. Where
I think the driver of the performance or the economy in
are you spending time today and are you still finding
emerging Asia, if you look at over the last 20 years, has to do
investment opportunity?
with the volume of migration from the poor to the middle class
population. About 33% of all the emerging Asia population
Taizo Ishida
moved up to the middle class, in the last 20 years. As opposed
Sure, so what is interesting is, we went to Pakistan, so these are
to if you look at the rest of the other regions. This is a big
the pictures I took when me and the team went to Karachi just a
driver of the frontier markets even today.
few months ago. Now, the picture you're seeing on slide 16 is—
I am not sure if you can tell which country or which city that
Jodi Morris
picture shows. MacDonald’s, just in front of the airport, very
Great, thanks Taizo for that update. For our remaining time I
nice this MacDonald’s and a sophisticated mall…. It could be
am going to go back to some of the inbound questions we have
Singapore. It could be Kuala Lumpur, but the answer is it is
received and some during the call, which all seem to be
Karachi.
centered on China. Robert, I am going to turn it over to you to
address some.
An interesting sidenote, speaking of Mr. Modi, Modi, is that he
used to be the Governor of the State of Gujarat, which is very
Robert Horrocks
close to Karachi. So many, many people in Karachi actually
Sure, we have one question, “What is the follow-through effect
came from Gujarat. Karachi is a city of 20 million people and
on the Asian markets of a real estate led slowdown in China?” I
it is quite diverse. I am sure this is something you didn’t know.
will couple that with a question of, “If this were a baseball
This illustrates a key point about frontier markets in general.
game then what inning is China’s credit cycle at the present?”
You just don’t know these sort of things before you get there.
which we kind of chatted a little bit as a team, and first people
So much of what you are hearing from the media, Western
had to explain to me that there are in fact nine innings in a
baseball game, in Cricket we only have two.
WC041_T
11
I would kind of put it halfway through. I think some people
Here is one interesting fact that we have learned. In China, as in
were a little bit more optimistic in terms of thinking that we
many developed markets, there does tend to be asymmetry in
were further through the credit cycle in China. I think there was
accessed information. What that means, is large institutional
really one big spurt of government-led stimulus just after the
investors in China, like the large banks and mutual funds, tend
financial crisis. Everything else then, the growth of credit has
to have better information than mom and pop investors. So
largely been driven by the non-bank financial system, and I
what we have learned is that in the last couple of defaults, the
think the government is still trying to slow that down, so I think
institutional investors were able to sell their bonds in time and
we have still got a ways to go. That will impact the real estate
actually ended up selling them to small retail investors. So
market.
unfortunately, the losses are not necessarily being accrued
fairly in society, and I think that is also potentially the
Now, what are the impacts on the rest of Asia of a slowdown
implication in terms of the shadow banking sector. I think the
led by the real estate? Well, the slowdown is being led by the
concern here really is whether or not the small retail investors
real estate now. The slowdown that you have been seeing for
are really going to be protected, and that, I think, speaks more
the last three years is part of that and a big part of that is the
to policymakers in China and their need to really focus on
slowing real estate market. The links between other Asian
creating a level playing field, so that it does develop into a
economies and China are not huge in many ways. One big link
healthy domestic capital markets for everybody.
is commodities. That impacts Australia. It impacts Latin
America a lot more than it does the rest of Asia. Other links are
Jodi Morris
in the sort of trade links, and generally about the supply chain
Okay, well we are running short on time, so what I would like
and the value add chain in producing merchandise exports that
to do just to wrap up is a quick lightning round, we covered a
actually end up in the U.S. and Europe. So a slowdown in
lot of ground today, a lot of different topics and of course
domestic demand in China doesn’t have that big an impact on
talked about portfolios, but if I could ask a question and leave
the rest of Asia directly. Then, the other is capital markets
one thought, if you can leave one thought with our audience
which is kind of interesting, that if you do get a slowdown in
here. What is the one thing that you think investors are missing
investment in real estate in China, to the extent that the Chinese
when thinking about investing in Asia, so Teresa, we will
want to look for other opportunities in investment, it might
continue on with you.
actually spur investment into the rest of the region, and that
typically, I would expect, you would see it show up in South
Teresa Kong
East Asia.
I think it is especially important to look at markets and how
they develop through the front windshield, as opposed to
Teresa Kong
looking through the rear-view mirror, especially in the case of
Following on Robert’s point about the development of the
China where I think people are still saying, where are we today
capital markets, there have been several questions about the
relative to yesterday? Instead, we really need to look at China
outlook for defaults and especially in the China onshore bond
in terms of what does it need to do to become a developed
market. I think it is important to point out that there have been
liberalized capital markets, and if you look at it from that
defaults in the past and there will continue to be defaults, and
perspective, I think the developments and the increased
again, we think that defaults on a periodic basis are not only
volatility will be much more palatable and will make a lot more
healthy but necessary to develop the market.
sense.
WC041_T
12
Jodi Morris
Robert Horrocks
Yu, what are investors missing?
My word would be change. Asia is constantly changing. I had
one question about what has caused profit margins to decline
Yu Zhang
and what will change so that they stabilize. Many inputs into
I think, at the beginning of the year, I mentioned my New Year
margins declining, the big one I think is labor, and what will
resolution is China A-share, so just to give a further update. I
change is that people will replace expensive labor with cheap
think the opening up of Chinese markets, the capital market is
machinery and this is something that is only in the control of
really happening, so we are starting to see that China is going to
the CEOs and this is something that is impressive across the
open up its A-share to Hong Kong exchange I think sometime
board in Asia, CEOs, businesses change their business models,
in August, through the so called ‘Through train’ Scheme,
find new more efficient ways of doing things. The politicians
overseas investors can access the Chinese A-share market and
change and they have a very strong reformist then, so Asia at
also recently we have seen reports saying MSCI was
the moment has, I think, this year stabilized a little bit. It had
considering adding China to its emerging market index. I bet
the valuation event, what it doesn’t yet have is momentum in
that in the near future, that for any long-term investor, China as
the minds of investors, but what it certainly has in spades is
an investment allocation, probably will take a much bigger
change.
share than it does today. So that is quite encouraging I think. I
would encourage everyone to follow that.
Jodi Morris
Right, well, thank you Robert, Taizo, Yu and Teresa and
Jodi Morris
everybody who joined us today and thank you for all the great
Taizo?
questions that you have submitted during and pre-webcast.
Thank you and at Matthews, we seek to be your resource for
Taizo Ishida
investing in Asia, so we seek and really appreciate your
Speaking of MSCI, they do not include Korea and Taiwan in
feedback on today’s roundtable, as well as these written
developed countries indices. Why is that? I guess Asia is
publications, so please keep it coming and have a great day.
improving constantly and you just can’t look at the Asia five
years ago and apply it today. So everything has changed so
quickly, that is the reason why we are going to more frontier
and smaller markets to see what is available. This is probably
similar to what happened 10, 20 years ago. Look at the ASEAN
countries; these markets were very small then. Today we look
at them and it is a pretty substantial market and that is going to
happen for another 10 years from now to those smaller markets
in Asia, that is why you constantly have to look at the newer
markets, new companies and then you have to adjust the
portfolio accordingly. The reason why I think you should look
at the actively managed portfolio over the index.
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Portfolio Manager
Roundtable
June 11, 2014
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 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.
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.
© 2014 Matthews International Capital Management, LLC WC041_T
1
Today’s Speakers and Moderator
Asia Strategic Income
Asian Growth and Income
Jodi Morris, CFA, CFP®
Moderator
Teresa Kong, CFA
Portfolio Manager
Robert Horrocks, PhD
CIO and Portfolio Manager
Asia Dividend; China Dividend
Asia Growth; Japan; Emerging Asia
Yu Zhang, CFA
Portfolio Manager
Taizo Ishida
Portfolio Manager
2
Matthews Asia Investment Strategies
Asia Strategic Income
Asian Growth and Income
Asia Dividend*
(China Dividend)
Asia Growth
(Japan; Emerging Asia)
Teresa Kong, CFA
Robert Horrocks, PhD
Yu Zhang, CFA
Taizo Ishida
APPROACH
Seeks total return through credit, currencies, and interest rates via a fundamental, bottom‐up investment process. Attempts to offer a more stable means of participating in Asia’s growth while providing some downside protection.
Invests in income‐paying equities. Seeks combination of current income and dividend growth.
Seeks to identify the most attractive growth in companies in Asia. HOLDINGS
Primarily bonds and other debt securities of Asian corporate and sovereign issuers. Invests across currencies and the capital structure.
Dividend‐paying securities and fixed income securities, such as convertible bonds and corporate bonds.
Equities of companies with attractive yields relative to the potential for dividend growth.
Equities of domestically‐oriented companies, including Japanese companies benefiting from regional integration in Asia.
GEOGRAPHY
Asia (Developed, Emerging
Market)
Market)
Market)/ China
Asia (Developed, Emerging Market,
Frontier)
BENCHMARK INDEX(ES)
HSBC Asian Local Bond/
J.P. Morgan Asia Credit MSCI AC Asia ex Japan MSCI AC Asia Pacific/
MSCI China
MSCI AC Asia Pacific/ MSCI Japan/
MSCI Emerging Markets Asia
INCEPTION
2011
1994
2006 Asia Dividend
(2009 China Dividend)
2003 Asia Growth
(1998 Japan; 2013 Emerging Asia)
LEAD MANAGER(S)
*The largest account in the Strategy is closed to most new investors
3
Key Questions Regarding Asia as We Reach the Midpoint of 2014
 Is it a turning point for emerging markets and Asia?
 Is the China consumption story still intact?
 Is “Abenomics*” working?
 Will the changing political landscape in Asia make markets more volatile?
 What are the contributors to growth in Asia’s frontier markets?
*“Abenomics” refers to the economic policies advocated by Shinzō Abe since the December 2012 general election, which elected Abe
to his second term as Prime Minister of Japan. Abenomics is based upon "three arrows" of fiscal stimulus, monetary easing and
structural reforms.
4
Are Asia’s Low Valuations Warranted?
Asia ex Japan (May 1994 – May 2014)
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
a
5.0
Asian Financial Crisis
1.0
SARS Outbreak
Global Financial Crisis
0.5
0.0
0.0
1994
1996
1998
2000
Asia ex Japan Forward P/E
2002
2004
2006
2008
Asia ex Japan P/B
2010
2012
2014
Linear (Asia ex Japan Forward P/E)
Asia ex Japan
China
Hong Kong
India
Japan
U.S.
Forward P/E
10.9x
8.5x
12.4x
15.3x
13.8x
16.8x
Dividend Yield (%)
2.67
3.63
2.86
1.45
1.74
1.72
Trailing Dividend yield estimates for 2014 as of 6/6/2014 based on FactSet aggregates as defined by FactSet. The dividend yield does not
represent or predict the yield of any fund or strategyThe forward price per earnings ratio (“Forward P/E”) is calculated by dividing the
market price per share by the expected earnings per share for 2014. Forward P/E was calculated as of 6/6/2014 and is forward looking.
There is no guarantee that Forward P/E will be realized.
Source: FactSet Research Systems
5
China—The World’s Best Consumption Story
1Q14 final consumption* accounted for 5.7% of China’s 7.4% GDP growth
16%
14%
12%
10%
8%
6%
4%
2%
0%
‐2%
‐4%
‐6%
1996
1998
Final Consumption*
2000
2002
Gross Capital Formation
2004
2006
2008
2010
Net Exports of Goods and Services^
2012
1Q14
GDP Growth Rate
*Final consumption equals private plus government consumption
^Net exports are the value of exports minus the value of imports
Source: CEIC
6
Strategy | Asia Strategic Income Strategy
Current Strategy
— Seek to generate an attractive total return over the long term with an emphasis on income by investing primarily in Asian corporate and sovereign bond issuers — Has the flexibility to invest in local and hard currency‐denominated securities and across capital structures, from senior debt to dividend‐yielding equities — Fundamental, bottom‐up investment process seeks to generate returns through security selection based on our outlook for credit, currency and interest rates Looking Forward
— If China’s capital markets continue to liberalize, we expect currency volatility and interest rates to rise. We deem such an increase in volatility to be both necessary and healthy
— A stronger global backdrop, backed by recovery in the U.S. and stabilization in Europe should provide an additional boost to Asia export growth
— While rising U.S. interest rates might pose a headwind to Asia rates and currencies in general, we still see attractive return potential from credit overall
— We expect Asia bonds, especially U.S. dollar‐denominated, higher yielding bonds, to perform well compared to other fixed income asset classes. This includes government, investment grade credit and emerging market bonds from Latin America, Eastern Europe, the Middle East and Africa
The statements above are based on the beliefs and assumptions of our portfolio management team and on the information currently
available to our team at the time of such statements. Although we believe that the expectations reflected in these statements are
reasonable, we can give no assurance that these expectations will prove to be correct.
7
Strategy | Asian Growth and Income Strategy
Current Strategy
— Seeks to participate in the upside opportunities that exist through the growth in Asian markets, whilst maintaining a keen eye on capital preservation during more volatile time periods
— A focus on industries likely to sustain long‐term growth—health care, telecommunications, consumer‐related and industrial services — Continue to focus on individual security selection in companies with high quality and transparent management teams that have demonstrated ability to create value across economic cycles — Look to take advantage of attractively priced but high‐quality, cyclical companies in which the market may hold concerns over short‐term issues Looking Forward
— Asia Pacific ex Japan’s valuations are now at a substantial discount to the U.S., and appear attractive on most metrics at about 12x forward earnings and 1.5x book value, although some polarization still exists across markets and industries — Throughout much of the region, relatively loose monetary policy over the past five years has resulted in credit growth increasing at a faster rate than GDP. This may lead to tighter monetary policy in the months ahead in order to slow future credit growth
— China’s “shadow banking” system and overall credit allocation need to be monitored closely as the country transitions from fixed asset and export‐led growth to a more sustainable domestic demand‐driven economy
— Macroeconomics and politics may remain the principal drivers of markets. While much “tapering” has been priced in, unconventional/uncertain macroeconomic policies continue in the U.S., Europe and Japan whilst election outcomes in India and Indonesia could lead to further volatility
8
Strategy | Asia Dividend Strategy
Current Strategy
— Remain positioned to benefit from Asian domestic consumption, with significant overweight in the consumer staples, consumer discretionary and telecommunication services sectors — Continue to be significantly underweight in sectors such as financials, materials and information technology
— Last year’s broad sell‐off in Emerging Asia presents opportunities in quality businesses at attractive valuations. During the first quarter, we added to companies in Indonesia, India and Thailand
Looking Forward
— Holdings in Indonesia have done well recently, and we will continue to monitor underlying economic fundamentals
— "Abenomics" in Japan may lead to rising wages for workers that could improve consumption and create a so‐called "virtuous cycle." The impact of Japan’s new sales tax hike bears monitoring as it could prompt the Bank of Japan to tweak its monetary stimulus program — After the aggressive sell‐off period since May 2013, the tapering scare has largely been priced in. Valuations have returned to attractive levels, particularly for some firms that have high dividend payouts, higher dividend yields and stable business models
9
Strategy | Asia Growth Strategy
Current Strategy
— Remain positioned to benefit from companies with strong pricing power and sustainable profit margins throughout Asia’s developed, emerging and frontier economies
— Continue to focus on rising domestic consumption, with particular attention to changes in lifestyle or purchasing behavior — Invest across the market‐cap spectrum with a bias toward growth opportunities in smaller cap companies
Looking Forward
— Japan’s stock market has stagnated for several months due to concerns over the diminishing impact of “Abenomics;” however, we maintain a positive outlook toward Japan as we anticipate a weaker yen may result from a recovery of the U.S. economy during the second half of 2014
— We continue to look throughout the region for opportunities to invest in growing companies with attractive valuations
— We will continue to evaluate building further positions in the region’s frontier markets such as Sri Lanka, the Philippines, Bangladesh and Pakistan
10
India Elections
Comparison of 2009 and 2014 India election results
2009 INDIA ELECTION RESULTS
Bharatiya Janata Party
Indian National Congress
Nationalist Congress Party
Others
2014 INDIA ELECTION RESULTS
All India Anna Dravida Munnetra Kazhagam
All India Trinamool Congress
Bahujan Samaj Party
Biju Janata Dal
Samajwadi Party
Shiv Sena
Telugu Desam Party
Source: Priyanka Atre and Thanh‐Trang Hoang‐Le published on MAASSMEDIA
11
Which City is Represented in the Photographs Below?
These photographs were taken by Taizo Ishida on a recent research trip in Asia
 Kuala Lumpur
 Karachi
 Singapore
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Massive Migration out of Poverty—Consumption Story
GDP growth and poverty reduction, 1990 – 2010
Annualized GDP Growth Rate
Cumulative Reduction in Poverty Rate 40%
10%
32%
8%
24%
6%
16%
4%
8%
2%
0%
0%
Developing Asia*
Middle East & North Africa
Latin America & Caribbean Reduction in Poverty at $1.25/day (2005, PPP$^)
Sub‐Saharan Africa
GDP Growth
Source: Asia Development Outlook 2014
*In Asia and the Pacific, the countries covered are Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and
Uzbekistan in Central Asia; the People’s Republic of China in East Asia Fiji and Timor‐Leste in the Pacific; Bangladesh, Bhutan, India,
the Maldives, Nepal, Pakistan, and Sri Lanka in South Asia, and Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia,
the Philippines, Thailand, and Viet Nam in Southeast Asia
^The cumulative reduction in the poverty rate is estimated as the difference in the percentage of poor people between the latest
year in the 2000s and the earliest year in the 1990s for which data are available, weighted by 2010 and 1990 population.
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Disclosure
This document does not constitute investment advice or an offer to provide investment advisory or investment management services, or the solicitation of an offer to provide investment advisory or investment management services, in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction. This document is provided on a confidential basis for informational purposes only and may not be reproduced in any form or transmitted to any person without authorization from Matthews International Capital Management, LLC. Investors should ascertain from their professional advisers the consequences of investing with Matthews under the relevant laws of the jurisdictions to which they are subject, including the tax consequences and any exchange control requirement. Investors should carefully consider the investment objectives, risks, charges and expenses of any strategy before making an investment decision. Past performance is not indicative of future results. As with any investment there is always potential for gains as well as the possibility of losses. These materials are intended for informational and discussion purposes only. To the extent that these materials are circulated, it is intended that they be circulated only to persons to whom they may lawfully be distributed and any recipient of these materials should inform themselves about and observe any applicable legal requirements. Persons who do not fall within such descriptions may not act upon the information contained in these materials.
The information presented in these materials is believed to be materially correct at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Nothing set out in these materials is or shall be relied on as a promise or representation as to the future. The manager referred to in these materials is a U.S.‐based investment adviser registered with the U.S. Securities and Exchange Commission who has not represented and will not represent that it is otherwise registered with any other regulator or regulatory body. An investment in the Asia Strategic Income Strategy is subject to credit, currency and interest rate risks. Credit risk is the change in the value of debt securities reflecting the ability and willingness of issuers to make principal and interest payments. Currency risk is a decline in value of a foreign currency relative to the U.S. dollar which reduces the value of the foreign currency and investments denominated in that currency. Interest rate risk is the possibility that the Strategy’s yield will decline due to falling interest rates and the potential for bond prices to fall as interest rates rise. The Strategy may invest in the following: derivatives which can be volatile and affect Strategy performance; high yield bonds (junk bonds) which can subject the Strategy to substantial risk of loss; and structured investments which can change the risk or return, or replicate the risk or return of an underlying asset. The Strategy is subject to risks associated with investing in a concentrated strategy, and the value of the Strategy will be greatly affected by the fluctuations in the value of a single security.
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Index Definitions and Glossary
The HSBC Asian Local Bond Index (ALBI) tracks the total return performance of a bond portfolio consisting of local‐currency denominated, high quality and liquid bonds in Asia ex‐
Japan. The ALBI includes bonds from the following countries: Hong Kong, China; India; Republic of Korea; Malaysia; Philippines; Singapore; Taipei, China; and Thailand.
The J.P. Morgan Asia Credit Index (JACI) tracks the total return performance of the Asia fixed‐rate dollar bond market. JACI is a market cap‐weighted index comprising sovereign, quasi‐sovereign and corporate bonds and is partitioned by country, sector and credit rating. JACI includes bonds from the following countries: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Thailand and Singapore.
The MSCI All Country Asia ex Japan Index is a free float–adjusted market capitalization–weighted index of the stock markets of China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, Korea, Taiwan and Thailand. The Matthews Asian Growth and Income may invest in countries that are not included in the MSCI All Country Asia ex Japan Index. The MSCI All Country Asia Pacific Index is a free float–adjusted market capitalization–weighted index of the stock markets of Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, Korea, Taiwan and Thailand.
The MSCI China Index is a free float–adjusted market capitalization–weighted index of Chinese equities that includes China‐affiliated corporations and H shares listed on the Hong Kong Exchange, and B shares listed on the Shanghai and Shenzhen exchanges.
The MSCI All Country Asia Pacific ex Japan Index captures large and mid cap representation across Australia, Hong Kong, New Zealand, Singapore, China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand. With 683 constituents, the index covers approximately 85% of the free float‐adjusted market capitalization in each country.
The MSCI Japan Index is a free float–adjusted market capitalization–weighted index of Japanese equities listed in Japan.
The Tokyo Stock Price Index (TOPIX) is a capitalization‐weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The MSCI Emerging Markets (EM) Asia Index is a free float‐adjusted market capitalization weighted index of the stock markets of China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.
It is not possible to invest directly in an index.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is an indicator of a company’s financial performance which is calculated as revenue minus expenses (including tax, interest, depreciation and amortization). Earnings Per Share (EPS) is the net income minus dividends on preferred stock divided by average outstanding shares.
Enterprise Value (EV)is a measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.
Enterprise‐Value‐To‐Sales (EV/Sales) is a valuation measure that compares the enterprise value of a company to the company's sales and is calculated as market capitalization plus debt plus preferred shares minus cash and cash equivalents and divided by annual sales.
Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country.
Price‐Earnings Ratio (P/E Ratio) is a valuation ratio of a company’s current share price compared to its per‐share earnings and is calculated as the market value per share divided by the Earnings per Share (EPS).
Price‐to‐Book Ratio is used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock is undervalued.
Price‐to‐Cash‐Flow Ratio is the ratio of a stock’s price to its cash flow per share. The price‐to‐cash‐flow ratio is an indicator of a stock’s valuation, calculated by dividing the share price by the cash flow per share.
Price‐to‐Sales Ratio is a valuation metric for stocks. It is calculated by dividing the company’s market cap by the revenue in the most recent year; or, equivalently, divide the per‐share stock price by the per‐share revenue. © 2014 Matthews International Capital Management, LLC WC041_T
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