Robert J. Horrocks, PhD, Chief Investment Officer and Portfolio Manager, Andy Rothman, Investment Strategist, and S. Joyce Li, CFA, Portfolio Manager, Matthews Asia discuss a macroeconomic view of Asian markets, the opportunity for investment in China’s economy, and dividend strategies in a post-pandemic economy.
When market leaders of high gross sectors like tech and healthcare struggled this year, there was a shift in investment focus from growth stocks and conceptual businesses to value stocks and businesses that generate immediate cash flows.
“There’s good value in conceptual businesses right now, but the market’s going to be a lot more discriminating going forward, and it’s going to want to see a clear path to cash flows, if businesses are not generating those cash flows already,” says Horrocks.
Horrocks predicts that how long the market continues to favor value over growth will depend on inflation output. A high inflationary environment tends to favor small-cap, cash flow businesses over large-cap, conceptual businesses. Horrocks expects that there will be a period of greater inflationary pressure, but ultimately central banks will come back in and tame it.
Because Asia didn’t experience the same economic damage done by the lockdown as the United States and Europe did, other federal banks are expected to tighten up policy before Asian central banks do. This means that the inflationary environment will continue a lot longer in Asia than it will in the rest of the world, and small-cap businesses that generate immediate cash flow will continue to be favored in the Asian markets. There’s been incredible expansion of the private sector in China in the past few years.
“About 90% of urban employment is in small, entrepreneurial, urban companies,” says Rothman. This development of the private sector and economic freedom has greatly expanded personal freedom. China has the world’s fastest growing consumer market and continues to drive global growth, as it accounts for about a third of global economic growth, which is more than the share from the United States, Europe, and Japan combined.
This growth doesn’t make China an economic threat to the United States, as its per capita GDP is only a quarter of the United States’ GDP, but it instead makes China’s economy a very attractive investment opportunity. Joyce Li explains that rising rates, coupled with global growth and moderate inflation, makes a healthy environment for Asian companies.
“A key feature of dividend growth stocks in Asia is their diversity in terms of business models, industries, and countries. Many of these companies are indeed growth companies, with earnings growth driven by domestic economies, and their dividend payments benefit from growth in underlying earnings,” says Li.
Li also discussed the importance of balancing high-yield, slow growing businesses and low-yield, fast growing businesses in a portfolio. The balance between these two categories manages volatility and allows investors to stay invested in such a dynamic market. The flexibility that Matthews Asia has to dip into growth and value differentiates the firm from competitors and allows investors to take advantage of all growth opportunities.
Matthews Asia is an independent investment specialist that was founded in 1991. Matthews Asia uses a broad range of Asia-focused investments to offer solutions to individuals, advisors, and institutions.
To learn more, register & watch a replay of Matthews Asia’s webcast: Midyear Outlook: Navigating the Headwinds and Tailwinds in Asian Markets.
On this webcast, Chief Investment Officer Robert Horrocks, PhD, Investment Strategist Andy Rothman and Portfolio Manager Joyce Li cover:
- A macroeconomic view of Asian markets
- How inflation is influencing market movements and its impact to this region
- Investor concerns about investing in China and why the region remains attractive
- The importance of a dividend strategy that blends growth and value in today’s environment
- Thematic investment opportunities that investors should consider now