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The Asian Equation: These 3 Trends Could Mean Big Gains for Investors

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Call it the Asian Equation. Impressive economic growth and rising personal wealth—combined with economic reforms in many of the developing nations of the Asia-Pacific region*—could make it the best investment story of the next decade. That story is captured in three numbers…

2.02 billion people: The number of consumers in the region who are expected to be part of the middle class by 2020, up 47% from 2015. They will have more discretionary income, thanks to higher minimum wages and better-paying jobs in big cities. That’s transforming Asia from a low-cost manufacturing and exporting hub best known for electronics and commodities into a domestic consumption powerhouse.

5.4% GDP growth: The expected annual growth in gross domestic product (GDP) for the region over the next several years driven by higher domestic consumer spending and greater intra-regional trading. It’s about twice the annual rate that the US has been able to achieve in its own economic ­expansion since the end of the 2007–2009 recession. Although China’s growth has slowed and stabilized in the 6%-to-7% range in recent years, urban household income in China continues to rise by about 10% annually, and now several other countries in the region are growing at a high-single-digit pace, including India and the Philippines.

12.4 P/E: The average price-to-­earnings ratio (P/E) of the region’s stocks, a common measure of valuation. Even after returning 42% in 2017, Asian stocks still are about 30% ­cheaper, on average, than the stocks in the Standard & Poor’s 500 Index.

To help you select stocks that should benefit the most, Bottom Line Personal spoke with top-performing Asian stock fund manager Eric C. Moffett, who is based in Hong Kong…

How I Invest

Investors should adjust their view of stocks in the emerging countries of the Asia-Pacific region. In the past, the most well-known stocks tended to be exporters that either manufactured low-cost goods such as consumer electronics or produced commodities such as agricultural products, metals and minerals. But those types of businesses depended heavily on global demand from Western countries, which made their stock prices highly volatile. For example, stock prices have fluctuated wildly for Asian steel and aluminum producers in 2018 as the White House has imposed high tariffs on US imports of those ­metals. And because wages have soared in China’s factories in recent years, more low-cost goods come from countries outside Asia now—including Mexico, where hourly wages are 40% lower.

Considering all these factors, when I invest in the region’s stocks, here are the criteria I look for…

Large companies with high-­quality growth. These are the kind of investments that Warren Buffett would make—profitable businesses that can steadily compound their earnings by 10% to 15% a year for the next decade or more and that have lots of free cash flow. Lots of cash on the balance sheet means that the company can expand without going heavily into debt and better withstand adverse conditions or unexpected challenges.

Industries that directly benefit from the rise in Asian consumerism. I prefer to invest in businesses that target the gigantic Asian domestic market, which has more consumers than the US, Europe and Japan combined. Below are three industries that I believe hold the most promise, as well as stocks of high-quality growth companies that I own in these industries…

Information Technology

This is the most exciting and largest area of my portfolio now because technology is just beginning to change how millions of Asians shop, socialize and entertain themselves. What’s more, US behemoths such as Google parent ­Alphabet Inc. and Facebook have limited penetration in Asian markets due to cultural barriers and government restrictions. Two information-technology stocks that my fund owns…

Tencent Holdings (TCEHY) is a sprawling Chinese Internet giant that has no ­direct equivalent in the US. The company began as an online gaming provider, but it has leveraged its ­customer base of more than one billion users into a dominant digital empire. It owns China’s biggest social network and digital-payment system, WeChat, as well as e-commerce, video-streaming and cloud-storage services. Half of all the time that Chinese consumers are on their smartphones is spent using a Tencent app. In 2019, revenues from advertising on Tencent’s apps alone are expected to bring in
$7 billion. The company is using its enormous cash flow to acquire competitors and form alliances throughout Asia and the world. Tencent now owns a 5% equity stake in Tesla and has teamed up with Elon Musk to develop its own driverless cars in China.

Sea Ltd. (SE) is a younger, more aggressive and volatile play on digital services for smartphones. The Internet company, which went public last year, operates in seven fast-growing southeast Asian nations. It has three brands—­Garena for online games, Shopee for e-commerce and AirPay for online payments.

Consumer Discretionary

About 30% of my portfolio was recently in the consumer sectors—both discretionary and staples—including restaurant chains and automakers, two of the most direct ways to tap into increased middle-class spending. Travel-and-leisure stocks my fund owns…

Jollibee Foods (JBFCY) has 3,000 Jollibee restaurants serving Filipino-style spaghetti and chicken dishes in Hong Kong, Singapore, Vietnam and its home country, the Philippines. It also has monetized the brand loyalty of 12 million Filipinos working overseas by opening stores in locations ranging from Jersey City, New Jersey, to Riyadh, Saudi Arabia.

Tata Motors (TTM) is the largest ­automotive company in India. Car ownership there will see explosive growth because the country has an average of just 31 vehicles per 1,000 people. (The US has more than 800 vehicles per 1,000 people.) Steep Indian import duties on automobiles—60% of the purchase price and higher—keep global competition at bay. Tata also owns two iconic and highly profitable British luxury brands—Jaguar and Land Rover—which are popular throughout Asia.

Yum China (YUMC). The Chinese division of the US restaurant chain operator, Yum Brands, was spun off in 2016. It owns more than 7,600 restaurants in China, including brands such as KFC, Pizza Hut and Taco Bell, that attract a combined two billion customer visits annually. This is one of the biggest holdings in my portfolio. The business is a cash-making machine, and Yum China could easily triple its number of existing restaurants by expanding into hundreds of lower-tier cities and transportation hubs, such as railway stations.

Consumer Financial Services

More than 700 billion Asian adults still do not have bank accounts. As individuals migrate from villages to cities, they need bank services to help them pay bills, take out loans and send money to relatives. Two financial-services stocks that my fund owns…

DBS Group (DBSDY). The ­Singapore-based bank, with a full range of consumer and corporate banking services, is the largest in Southeast Asia, with nine million customers in 18 markets. Its asset-management business oversees more than $150 billion. Global Finance magazine has named DBS one of the most stable banks in the world.

AIA Group Ltd. (AAGIY) was formerly a subsidiary of the insurance company American International Group (AIG), which, during its US government bailout in 2008, was forced to sell AIA. A decade later, AIA is one of Asia’s dominant life, accident and health insurers, present in 18 markets and serving the holders of more than 46 million individual and group policies.

*Moffett’s investments in the Asia-Pacific region typically focus on two city-states—Hong Kong and Singapore—as well as China, India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, Thailand and Vietnam.

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Source: Eric C. Moffett, portfolio manager for the T. Rowe Price Asia Opportunities Fund (TRAOX). Its 10.5% annualized return over the past three years ranks in the top 6% of its category. Date: August 15, 2018 Publication: Bottom Line Personal
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