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Japan’s Attractions

Japón pretende paliar el descenso del consumo interno con los ingresos del turismo — Photo: Jun Takeuchi. Japan's Attractions

A decade ago when I was on a flight from Tokyo to Beijing, I noticed Chinese tourists lugging home Japanese rice cookers. Four years ago, I encountered groups of Chinese tourists enjoying themselves at hot springs outside of Tokyo. Last month in Ginza, a Chinese-speaking salesperson didn’t miss the opportunity to remind me to pay with China’s UnionPay, a popular payment card, to purchase duty free items while busy helping to wrap gifts for tourists. As a testament to my own experience, from the start of this year until August, Chinese tourists to Japan were up by 84% from last year, according to the Japan National Tourism Organization.

This is an exciting trend for Japan’s large and small retailers, hotels and airline companies, and was a particularly welcome buffer after Japan’s April tax hike led to a domestic consumption decline earlier this year. Media reports note tourism revenues are expected to help make up the shortfall stemming from Japan’s shrinking population. According to Japan’s Ministry of Internal Affairs and Communications, each Japanese citizen spent approximately US$10,800 (1.23 million yen) while every tourist to Japan spent about US$1,200 (137,000 yen) per trip in 2013.This means every nine tourists combined consumed as much as one Japanese in 2013. If this still holds true in 2020 when the country hopes to attract 20 million tourists, it will translate into roughly US$23.5 billion (2.7 trillion yen) or the equivalent consumption of 2.2 million residents. (Japan’s GDP in 2013 was US$4.90 trillion and just over 10 million foreign tourists visited that year.)

Before we ask whether the goal of attracting 20 million tourists is even achievable, I cannot help but wonder why tourists are so attracted to Japan. One factor that has helped boost tourism is the easing of travel visa requirements. Rising disposable incomes have also been a factor.

Also, some products in Japan tend to be cheaper than in other countries that may have higher taxes and quality of service is famously high. In fact, many people visiting Japan from elsewhere in the region have been quite surprised to find such things as sales staff willing to kneel down on the floor while helping shoe shoppers. Japan’s “elevator ladies” who bow as patrons exit or enter may also be surprising. Even gas station attendants will stop traffic in the street to do traffic control for customers.

This is all quite promising for tourism, but is Japan’s increase in visitors—especially Chinese tourists—truly sustainable? In the 1990s, there was a boom in China as visitors flocked to what was nicknamed, “Xin Ma Tai” for Singapore, Malaysia and Thailand. Back then, many Chinese were able to afford overseas travel only for the first time. Today, “Xin Ma Tai” is just one of the many options available, and these overseas destinations are sometimes even cheaper than domestic travel. In July, 342,600 Chinese tourists visited Thailand, 25% less than the same month last year. Meanwhile 281,200 Chinese visited Japan, 101% increase over last year. This year, South Korea beat both Thailand and Japan, becoming a more popular destination for Chinese tourists than either of those countries. The good news is that Asia’s tourism market is growing fast, but the bigger challenge is whether Japan can hold on to the current momentum until 2020.

Opinion column by Jia Zhu, Research Analyst at Matthews Asia.

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. 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. 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. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific 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. This document has not been reviewed or approved by any regulatory body.

Seaweed Snack Craze

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La última moda en snacks: algas saladas — Photo: Ben Dalton. Seaweed Snack Craze

Roasted and salted seaweed, traditionally eaten with rice in Asia, has become a popular snack food outside of the region. Being from Korea, I was astonished when I first encountered teriyaki-flavored seaweed and varieties that were mixed with almonds here in the U.S.—quite a difference from what I used to enjoy growing up, which was merely oil-roasted and slightly salted.

The sudden popularity of such dried, packaged seaweed snacks have led exports of seaweed, or gim as it is called in Korean, to surge. While many people know that the surname “Kim” is quite a ubiquitous Korean name (in fact one-fifth of the South Korean population are Kims), not many foreigners realize that it is pronounced “gim” just like the word for seaweed. The origin of the name is said to be from a Kim family that first started farming gim in the 17th century.

Nori, as seaweed is called in Japan (or zicài in China), has been cherished as a luxury food for hundreds of years. It is high in fiber and iodine, and has been used extensively in many cuisines since Japan invented a modern aquaculture method of cultivating the algae in the 1920s.

These days the Korean variety of edible seaweed is generally recognized as a superior quality product over seaweed produced in China, and tends to be more competitively priced than Japanese nori. Korea has produced more seaweed than Japan since 2011, and in fact also exports seaweed to Japan. The biggest overseas demand for Korean seaweed, however, comes from the U.S., which bought approximately US$64 million of the export in 2013, a whopping US$47 million more than it did in 2009. That is dwarfed by the country’s many tens of billions of dollars in exports of smartphones or automobiles, but seaweed still tops the list among U.S.-bound food exports, outpacing cigarettes, beverages and ramen.

With the consumption of seaweed gradually expanding to non-Asian consumers, seaweed products have received notable attention in new circles, and are frequently marketed as a healthy and tasty snack for the entire family. Major U.S. food retailers have even recently begun to launch private label seaweed products, and offer an increasingly wide range of variations.

Along with the U.S., Thailand, Canada, Russia, the United Kingdom, Brazil, and the United Arab Emirates are all seeing a big increase in such snack seaweed imports. It is interesting to see a food previously served only among particular populations or regions gaining global exposure. The ways in which the global food culture is evolving appears to be as dynamic as the evolution of global economies and industries.

Article by Soo Chang Lee, Research Analyst, Matthews Asia.

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. 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. 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. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific 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. This document has not been reviewed or approved by any regulatory body.

Equities in 2015: Europe and Japan

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Renta variable en 2015: Europa y Japón — Photo: Alberto Carrasco Casado. Equities in 2015: Europe and Japan

The outlook for the world economy at the start of 2014 was arguably more attractive than it is now. We had expected markets to rise this year but we believed that the more cyclical sectors would lead. Instead, it has been a year when markets have been driven higher by moves in a narrow sub-segment of the market. Indeed, we have been extremely surprised by the aggressive declines in developed market bond yields this year (to 200-year lows in much of Northern Europe), as investors lowered their expectations for inflation, started to fear deflation (in Europe) and, as a result of increasingly scarce global growth, opted to aggressively pursue companies with stable and visible profitability above all else.

In short, it has been a year when earnings revisions have not been indicative of stock price performance, as shown in the charts below. For example, the right-hand chart identifies that year-to-date changes in 12-month earnings expectations for cyclical and defensive stocks are broadly in-line. The left-hand chart, however, clearly shows that the prices of these two styles of stocks have not moved in line with their similar earnings expectations, with cyclicals being significantly de-rated. Essentially, expensive stocks, sectors and geographies, have in many cases become more expensive.

Enlarge

Looking forward, however, while expectations for growth at the start of the year were high – across much of Europe at least after a strong rally in the second half of 2013 – they are now suitably lowered. This creates what we think could be a potential mismatch between valuations and growth expectations. As such, our portfolios are overweight Europe and also Japan while underweight North America and Asia, reflective of these valuation differences and divergent growth expectations. We retain a bias for more cyclical sectors over the expensive more defensive sectors.

Opinion column by Matthew Beesley, Head of Global Equities at Henderson Global Investors.

Asia, Looking to 2015 and Beyond

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Over the next decade, I expect Asia’s economies to continue to raise living standards and to narrow the income gap between its own citizens and those in the U.S. or Europe.

Why do I think this?

Asia continues to have a high savings rate. A country cannot invest or grow over the long term without a pool of savings, and it can be r isky to rely on external funding to finance domestic growth. Asia currently has enough savings to support its own development. It also has a track record of increasing productivity through improving education. The region has championed the individuals’ desire to make money. It has successfully opened its markets to the world in order to learn about new products and methods of industrial organization. Finally, it has a decent track record of government policy reform to support growth and markets. None of this has been perfect; and indeed, although rates of change hace been fast, Asia is still a relatively poor part of the world. Over the long term, all of this just means that there is plenty of blue sky ahead.

But what about the next year?

Much will rest in the hands of central bankers and still more will depend on Asia’s reform progress. For those who think it is too easy to focus on the future and too dangerous to dismiss the near term, I will be watching the following during 2015 to see how Asia’s growth is progressing.

First, Japan is home to the world’s best central banker, Haruhiko Kuroda. How often has that sentence been written in the history of central banks? Mr. Kuroda has paid attention to the monetary policy scholars regarding zero percent interest rates. He knows he has to be aggressive— and indeed credibly aggressive—in monetary policy. He seems willing to confront the conventional wisdom that bankers must be conservative, die-hard inflation fighters. Prime Minister Shinzo Abe appears to support him on this issue. I expect Mr. Kuroda will continue to push inflation expectations up to 2% and to keep them there. Remember, a weaker yen is the symptom of the policy, not the policy itself.

This inflation policy also creates incentives for firms to whittle down cash balances and raise prices. Not all companies will do it but we will look for those that have the willingness and the ability to take heed.

Yes, in a weak yen environment, even domestically focused companies can be attractive holdings because a reflationary environment can offset the currency weakness, particularly among companies that use higher operating leverage.

How does this compare to the rest of the world?

With all the talk of tapering, in effect, monetary policy has been tightening in the U.S. since May 2013. The Standard & Poor’s 500 (S&P 500) seems unconcerned, as it continues to rise on somewhat expensive valuations, considering the fact that corporate margins are already high.

Most people expect the U.S. economy to strengthen—and there is probably better than a 50–50 percent chance that it will. But there must have been some impact from the tighter policy and I do not think investors are paying much attention to the risks of a slowdown. The recent fall in the price of oil is surely a warning that all is not well with global growth.

Opinion article by Robert J. Horrocks, Chief Investment Officer, Matthews Asia

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The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. 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. 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. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific 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. This document has not been reviewed or approved by any regulatory body.

Turkish Optimism Defies Difficult Backdrop

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It can be refreshing to encounter optimism as an Emerging Markets economist, given its rarity in these straitened times. Certainly, there is plenty of it to be found in Turkey. Despite, or perhaps because of, the country’s status as one of the original “Fragile Five” and the continued focus on its macroeconomic fundamentals, officials and private sector economists remain defiantly bullish about prospects overall. To be diplomatic, we are slightly more cautious.

Central to investor concerns, and a driver of lira weakness, has been the country’s external balance sheet position. The country is a clear outlier in terms of its reliance on external financing flows, with very high levels of short term external debt (approximately 25% of GDP). Within Turkey, comfort is drawn from the fact that the bulk of this borrowing is conducted by banks, who deposit dollars at the central bank to obtain lira liquidity. In essence, the high external financing requirement is not seen as a problem.

It is true that Turkish banks have managed to rollover debt without problems since 2001, even during the global financial crisis. But the loan to deposit ratio now stands at 113% following years of 20-30% credit growth, so some domestic activity at least is dependent on foreign financing. Even if Fed rate hikes do not bring a sudden stop, or reversal, of capital flows, the cost of borrowing will increase and drag on growth. Particularly as the central bank is targeting, among other things, a flat yield curve; Fed rate hikes will push up yields at the long end of the curve and necessitate hikes by the Turkish central bank.

“Central bank independence” is a phrase met with a polite cough at best in Turkey. The common perception, borne out by recent actions, is that the central bank will cut whenever possible in support of growth, despite inflation far above the 5% target. Happily, a combination of base effects, cheaper oil (Turkish energy imports totalled $55 billion in 2013), and reduced exchange rate pass-through will see inflation fall back sharply next year. However, a rebound is likely as the effects fade and as further rate cuts feed through.

Domestically saving is regarded as Turkey’s real problem, being relatively low at 15% of GDP (and only 12% in the private sector). This is the result of demographics, a low central bank rate, and economic and political uncertainty. A low savings rate helps fuel demand for foreign capital and limits domestic investment, so recently announced plans to boost saving and create an institutional investor base are welcome. However, with a 5-10 year timeframe, clearly a rapid turnaround is not in the offing.

In addition to this drag on performance, the trade outlook is not especially positive. Turkish producers are still not competitive enough, particularly when compared to Asian counterparts. Turkey is still very dependent on Europe as a market at a time when the Eurozone seems to be slowing. Meanwhile, the government has said it will reduce import dependency it is not clear how it plans to do so. It is difficult to see the current account deficit falling below 5% next year.

Politically, Erodgan appears to remain firmly in control, and a victory for his ruling party in next year’s elections seems assured. It is less clear that Erdogan’s party would survive him, however, and this dependency on one man represents something of a risk. Meanwhile, although ISIS is all but knocking on Turkey’s door, for now the country seems secure and is demonstrating no desire to enter into a regional war. Public opinion is against intervention, the Kurdish minority notwithstanding, and none of the analysts we spoke to saw ISIS as the main concern. If the West wants Turkey involved, they will need to commit their own troops first.

Following a recent trip to Istanbul, Craig Botham, Emerging Markets Economist at Schroders, shares his views on the Turkish economy.

CLO Rule Change Clouds Outlook for Bank Loans

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La nueva regulación para CLOs cambia las perspectivas para los préstamos bancarios — . CLO Rule Change Clouds Outlook for Bank Loans

Retail investors fell out of love with US bank loans this year, but demand from issuers of collateralized loan obligations (CLOs) has remained strong. New regulations may change that. Should investors be concerned? We think so.

First, a bit of background. In recent years, investors large and small have poured money into bank loans. Most were attracted by loans’ relatively high yields and their floating-rate coupons, which would provide insulation against an eventual rise in interest rates. At one point, loan mutual funds—a good gauge of retail demand—pulled in fresh money for 95 weeks in a row.

That streak ended earlier this year. Since then, retail investors have pulled money out of loans for 23 weeks running. At the margin, the reversal may have had something to do with concern about credit quality. As we’ve noted before, high demand for loans has allowed companies with fragile credit profiles to borrow on favorable terms without offering traditional protections to lenders.

But the bigger culprit, in our view, was changing interest-rate expectations. As it became clear the Federal Reserve would likely hold rates low for longer than many thought, it became less attractive to sacrifice the higher yields available on high-yield bonds for loans’ promise of floating income.

CLO Investors Play a Large Role in the Loan Market

A shift in demand as abrupt as the one loans experienced this year would normally cause considerable volatility. But the market weathered the change well. The reason? Issuers of CLOs—loans pooled together and issued with varying levels of risk and yield—have kept buying.

Now, new rules that require CLO issuers to retain a bigger slice of the loans they package and sell to investors may change that. The changes, part of the Dodd-Frank regulatory reforms, are meant to limit excessive risk-taking by ensuring that CLO managers have some skin in the game.

Instead, they may drive some CLO issuers out of the market. That’s because the risk retention rules make it more expensive for smaller players to create new funds. It’s unclear just how much this will affect demand. But the rule changes could sow the sort of volatility that the loan market managed to avoid when retail demand dried up.

While much was made of retail investor behavior in recent years, it’s clear that the leveraged loan market depends most heavily on CLO investors. As the Display shows, CLOs represented 44% of current leveraged-loan buyers through June. A change affecting nearly half the market is worth paying attention to.

Of course, CLO issuers won’t disappear overnight. The new rules were approved in October and won’t go into effect for two years. As such, next year might bring increased activity as CLOs rush to issue before the rules change. But over the longer run, we think things could get more complicated.

For one thing, it’s not clear who will step in to pick up the slack if CLO demand does taper off. Will retail investors come back? If not, will companies that have come to rely on the loan market for financing be forced to tap the bond market when their existing loans come due? Will bond investors play ball?

The answers to these questions are far from clear. It’s possible that investors will come up with creative ways to minimize the impact of the change. But in our view, the only thing that’s reasonably certain is that the leveraged loan market—and loan investors—face plenty of uncertainty.

As we’ve noted before, we think investors are already being undercompensated for the risk associated with bank loans. In our view, most of the perceived advantages of the asset class—high returns, floating rates, capital structure seniority—aren’t all they’re cracked up to be.

High-yield bank loans can be a part of a well-diversified fixed-income portfolio. But with so much uncertainty on the horizon, investors should be sure to weigh risk and reward carefully. In our view, a low-volatility high-yield strategy makes the most sense in the current environment.

Opinion column by Gershon M. Distenfeld, CFA, Head of High-Yield Debt Securities across dedicated and multisector fixed-income portfolios for AllianceBernstein.

The Pacific Alliance and MILA: Forging a New Future for Latin America

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La Alianza del Pacífico y MILA: Un nuevo horizonte económico en Latinoamérica — . The Pacific Alliance and MILA: Forging a New Future for Latin America

The Pacific Alliance –an innovative and dynamic trade and investment initiative– is gathering strength in Latin America. The four-country alliance, established in 2011, represents a new generation in regional economic cooperation.

Observers in Latin America and other parts of the world may ask why this latest effort at integration and free trade will be any different from the past.

Their skepticism is justified. Earlier regional trade pacts –typically lacking a realistic economic foundation or a true commitment to change– have failed to prosper.

The Pacific Alliance –which currently includes Chile, Colombia, Mexico and Peru– is different. It represents a new breed of Latin American free trade agreements that seeks to achieve real economic integration and gradually move toward the free circulation of goods, services, capital and people among its members.

In contrast to other, inward-looking regional integration efforts, the Pacific Alliance looks outward and plans to use the economic and financial energy of its partners to develop new ties with the rest of the world, in particular the Asia-Pacific region.

The Pacific Alliance is built on a solid foundation. It is made up of like-minded governments that believe open markets and free trade are the way to promote economic growth and development. The members recognize that trading among themselves is simply not a formula for sustainable long-term growth. They want to attract foreign capital, not block it out.

This open philosophy is particularly important in view of weaker prices for raw materials, the economic slowdown in China and the urgent need for Latin America to boost exports of higher value-added manufactured goods.

The Pacific Alliance is already a significant economic force. It has a combined market of 212 million people and a GDP of over $2 trillion, accounting for 36% of Latin America’s total economic output and about half of the region’s exports.

Together, the four economies rank as the world’s eighth largest economic block. Moreover, their combined GDP growth outperforms the regional average, their growth outlook is positive and they attract more than 40% of the direct foreign investment that flows into the region.

Since creating the alliance three years ago, member states have made steady progress in meeting the group’s goals. The partners have lifted visa requirements for nationals traveling between the four nations, voted to eliminate tariffs on 92% of the products they trade and are moving to consolidate their diplomatic offices in some parts of the world.

In addition, two years before the alliance was founded, Chile, Peru and Colombia took a bold step and began integrating their stock markets. In 2009, they established MILA –the Integrated Latin American Market or Mercado Integrado Latinoamericano– which began operating in 2011. Mexico, the largest economy in the group, recently formalized its entry into MILA, signaling its commitment to the Pacific Alliance integration process.

This move offers huge potential for investors in the region and in other parts of the world.

Other neighbors are already knocking on the alliance’s door. Costa Rica and Panama are moving to join, and 30 other countries –including Canada and the U.S. – are observers. Canada, which has free trade agreements with all four alliance partners, would be a natural fit, especially because of its significant investments in the mining and energy sectors of these countries.

MILA – A magnet for regional and international capital

Private equity firms, such as Bricapital, see a bright future for MILA. The integration of stock markets represents a giant step for local companies, pension funds and other institutional investors, both domestic and international. It will give investors and enterprises alike a greater supply of liquidity, securities, issuers, increased diversification and much larger sources of funding.

With the inclusion of Mexico, MILA’s combined market capitalization will be an estimated $1.08 trillion, close to that of Brazil’s Bovespa stock exchange.

Market integration among the alliance’s four partners will offer significant new opportunities for local pension funds to diversify their investments.

Each of the member nations places strict limits of how much their pension funds can invest internationally. But with MILA, the idea currently being considered is that investments in any of the MILA countries will be treatedas domestic.

This means that promising businesses in these markets will soon have access to a much deeper investment pool. The pension funds in Chile, Peru, Mexico and Colombia represent a total capital pool of $455 billion.

A larger, pan-regional stock market will attract new investment, providing additional capital and liquidity and improved competitiveness and innovation. In addition, MILA is expected to boost asset values, provide investors with many more investment options and exit opportunities. Those things spell more jobs and regional economic development growth, as well.

At Bricapital, we believe that the Pacific Alliance and MILA are generating new and exciting investment opportunities for the region, and will offer Latin America a brighter and more prosperous future.

Opinion column by Yrene Tamayo, Managing Director and Executive VP of Bricapital

Could the Fed Trigger a Market Collapse?

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¿Crédito high grade, high yield, o renta variable estadounidense? — . Could the Fed Trigger a Market Collapse?

The US central bank, the Federal Reserve, is the subject of criticism, no matter what it does. It has been roundly criticized for making money too easy and creating bubbles everywhere — in short, that its actions aren’t working. If its actions are working, then the talk is that this artificial support will have to be removed, and the Fed will trigger a market collapse by doing less.

I suspect, however, that the easy money accusation against the Fed —and the implication that stock prices have to fall without its efforts to keep rates low— may be erroneous. Here are my reasons:

Low rates and signaling

Now that its unusual program of bond buying known as quantitative easing has ended, the Fed is hinting that it will set out to slowly raise interest rates in 2015. By any comparison with previous cycles, rates are low and real rates, or stated government bond yields minus inflation, are abnormally low, especially when contrasted with the story of better growth in the US economy.

The Fed has already signaled its intention to let rates rise, and the equity market has continued to go up. Increases in interest rates, particularly those induced by the Fed, have historically been greeted by a rising, not falling, stock market. Why? Because such actions by the US central bank tend to occur in the face of expanding economic activity and the stock market welcomes sustainable growth. Also, price-to-earnings ratios often rise, not fall, in the face of protracted rate increases.

Debt and interest expense

The net debt held on the balance sheets of companies in the S&P 500 Index is much lower relative to their cash flow than we observed in the past three cyclical peaks. Therefore, a rise in rates won’t have the same negative impact on profits as in previous cycles. And the share of debt whose interest expense has been fixed is now at historical highs: 88% of the net debt of the S&P 500 is fixed with the issuance of public bonds, not at the mercy of flexible-rate bank loans. The high share of fixed-rate debt will also tend to cushion any shocks from rising rates.

Furthermore, US consumers — who buy most of the consumer goods and services produced by publicly traded companies — have far less debt relative to their disposable income than in other cycles. Thus, they won’t have to pull back spending that much to pay for higher debt service burdens.

Supply and demand imbalance

The world may be awash in government debt of all sorts, but it is also awash in savings and accounts that seek safety. Massive reserves have piled up in emerging markets, exporting countries and pension funds. These huge storehouses of money — accounting for about 28% of global GDP — reside mostly in US dollars and pursue primarily AAA-rated debt to purchase.

Yet the supply of triple-A debt has been dwindling as more countries receive lower ratings from credit agencies. And the United States, the world’s biggest supplier of new debt, has experienced smaller government deficits and so has less need to borrow. With the supply of good bonds shrinking while the demand for them rises, this imbalance tends to work in favor of higher bond prices and lower yields, which also puts a limit on how high US rates will go when the market, not the central bank, is determining rates.

Concluding thoughts

My first conclusion is that if the equity market was vulnerable to collapse from the Fed’s actions to taper this year and tighten next year, we would already have seen it by now. After all, the markets try to anticipate what is coming next. Fed rate increases should come as no surprise to investors who have known for years that rates haven’t been at the equilibrium levels that the markets would set.

Second, there is little support for the claim that the stock market is a bubble. Many valuation measures suggest the market is in fair value, not peak price, range. Third, inflation around the world is subdued or falling, further curbing the upward rise of interest rates.

Finally, the impressive profit performance of S&P 500 companies late in 2014 shows no signs of abating. I believe the evidence is piling up that the forward momentum of the US economy can support higher profits and higher rates.

China Balances New Appetites with Food Safety

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El gobierno chino considera la seguridad alimentaria como una prioridad — Photo: Raphael Labbé. China Balances New Appetites with Food Safety

Over the last decade, China’s disposable income per capita increased more than threefold at a compound annual growth rate of 12.3%. With rising consumption power, China’s population is spending more on food and beverages, not only in greater quantities but also on higher quality products.

That’s generally good news for food and beverage firms focused on China. Unfortunately, also on the rise has been the number of food safety issues in the country. This has affected items ranging from sausages to watermelon to baby formula, to name a few cases. Most recently, recycled oil from restaurant waste in Taiwan entered into the supply chain of hundreds of food manufacturers there, tainting several prominent brands that export products to China. Such cases have reinforced general consumer mistrust, even in well-established brands. Thus, people feel that they need to better self-regulate and avoid or limit most processed foods to minimize their exposure to potentially harmful chemicals and preservatives. By way of comparison, the average Chinese already consumes only a quarter of the amount of processed foods that the average American consumes.

Highlighting food safety as a priority, China has taken steps to improve nutrition and food manufacturing—efforts that were outlined for the first time in its last Five Year Plan (2011–2015). Furthermore, in 2013 China’s Ministry of Health mandated that processed food manufacturers disclose the nutritional value of their products using a standardized labeling format. As a result, consumers now have more data with which to make better-informed choices.

Some local businesses are addressing the issue of trust head on by proactively disclosing the source of their ingredients. During my recent research trip to Guangzhou, I ate at a popular Sichuan restaurant that promotes the memorable tagline “oil is used only once.” I decided to visit this restaurant after reading about its philosophy of using only the freshest ingredients. Its success was evident as there was a wait of more than two hours for a table.

Gaining, and especially rebuilding, consumer trust in China’s food and beverage industry will take time. There will inevitably be more scandals related to food safety. However, with each visit to China, I am encouraged to see progress being made toward a safer tomorrow, unleashing the strong underlying consumer demand and driving long-term sustainable growth in the food and beverage sector.

Column by Hayley Chan, Matthews Asia

The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. 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. 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. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific 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. This document has not been reviewed or approved by any regulatory body.

One-Child Policy

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La política de “un solo hijo” de China — . One-Child Policy

Last year’s decision to relax the one-child policy was an important political step by the Chinese government but it will have little impact on the country’s demographic and economic trends. Chinese leaders have effectively ended “one of the most draconian examples of government social engineering ever seen.”

Historical Background

Rapid population growth after World War II led to a global focus on birth control. One extreme response was India’s forced sterilization campaign between 1975 and 1976 when more than 8 million sterilizations were performed. In 1980, China began enforcing its “one-child policy,” which three prominent Chinese demographers, writing recently in a U.S. academic journal, called “the most extreme example of state intervention in human reproduction in the modern era. . .that has forcefully altered family and kinship for many Chinese.”

Last Year’s Policy Change

Last November, China’s Communist Party announced that the one-child policy would be relaxed by implementation of a policy in which families are permitted to have two children if either a husband or a wife is an only child. This marks a change from the previous rules which required both the husband and wife to be only children in order to qualify to have a second child.

Because this relaxation was accompanied by a decision to dismantle the one-child enforcement bureaucracy, in my view it spells the rapid end of the one-child policy.

The most significant aspect of this move is political, as it represents the Party’s decision to withdraw from its citizens’ bedrooms. Restoring this element of personal freedom should help rebuild people’s trust in the Party.

But, contrary to conventional wisdom, ending the one-child policy is unlikely to change the longer-term trend toward a lower fertility rate. China’s current fertility rate of about 1.5 could drop even lower in the future, closer to South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families.

Smaller Families Before One-Child

It is important to recognize that the steepest fall in China’s total fertility rate (the average number of live births per woman) actually came before enforcement of the one-child policy began in 1980. The fertility rate dropped by more than half, from 5.5 to 2.7, between 1970 and 1980, influenced by rising urbanization and falling infant mortality rates. Today, China’s fertility rate is about 1.5.

Although 11 million couples are now eligible to apply for permission to have a second child under the new policy, only 700,000 couples (6% of total) applied through August of this year.

Long-Term Impact

Last year, before the policy change was announced, I spoke with one of China’s leading demographers, Wang Feng, about the prospects for change. Wang is a professor of sociology at the University of California, Irvine, and is on the faculty of Fudan University in Shanghai. He is also a nonresident senior fellow at the Brookings-Tsinghua Center in Beijing, and he recently wrote that the one-child policy “will go down in history as a textbook example of bad science combined with bad politics.”

Following are excerpts from my interview with him. I began by asking him about the long-term impact of ending the one-child policy. Professor Wang said expectations for a rebound in the fertility rate have been exaggerated:

Professor Wang: The reason I say it’s exaggerated is because in most of China’s rural areas, couples who want to have two children have already had two. There are certainly some couples who would want to have two children, which would be good for them, but we have all indications showing that many urban couples are happy to stay with one. And then there are couples who are actually choosing not to have any children, given the larger financial ramifications—the cost of having them.

For instance, in Shanghai, fertility is even below the one-child-per-couple level. This is despite the fact that, because of the early implementation of the one-child policy, many Shanghai couples are in the only-child cohort and are thus eligible, under the current rules to have a second; but they are often choosing not to have a second and many are not even having one.

Click the following link to read the interview with Professor Wang Feng.

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