This week’s “Outside the Box” from John Mauldin brings us a good piece from Louis Gave on Asian stock markets’ forward prospects. For those who don’t subscribe, or aren’t inclined to read the entire piece, here are the conclusions (verbatim), which I think are well supported by the evidence:
- Asian currencies will remain well bid for the coming year and likely thereafter.
- Long-dated Asian government bonds are increasingly the best hedge against equity risk for any portfolio. After all, if the twin ‘fat-tail’ threats to equity markets today are a) a double dip recession in the US and b) a solvency crisis in Europe, then long-dated Asian bonds can immunize the risk from either of these events… at least, this is what has happened in the past quarter!
- Asian indices and ETFs are likely to suffer as the markets adjust to the new realities reviewed above; realities that are all too often under-represented in benchmarks. Investors deploying capital in Asia should do so with managers willing to stray massively from any benchmark.
- Within the Asian equity markets, we would favor high-dividend yield paying stocks, utility stocks and stable growth stocks, especially those linked to the consumer.
- Stocks linked to the infrastructure roll-out (steel, commodities, etc…) should be seen as a trade at best, or simply avoided, even if valuations now appear attractive. Such stocks were the main driver of the past decade’s Asian boom. They will not be the leaders of the next decade.
- As Francois-Xavier argued in a recent ad hoc comment (see The New Export Champions), going forward, Europe’s machine tool and capital good exporters may not be the top performers in a portfolio of exporter stocks. Instead, investors should focus on the Western world’s service exporters.
My approach to stock investing is that I favor individual issues and low cost ETFs in markets with which I am familiar. Where I’m not so well equipped to pick stocks or sectors, I will hire fund managers to do the work for me. Asia and developing markets is the area where I will still invest via mutual funds.
There are several good fund shops in the Asia space, among them Templeton and Matthews. I personally have holdings in the Matthews Asia Dividend Fund (ticker: MAPIX), which should continue to be a solid performer if Gave’s thesis proves to be correct. Being a top down investor, however, I will not be holding on through a general bear market. Remember, the first rule is don’t take large losses.