Is the Asian Economic Growth Story About to be Tapered? September 18, 2013 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 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. 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. 1
Today s Speakers and Moderator Asian Growth and Income and Asia Dividend Asia Focus Asia Growth, Emerging Asia and Japan Asia Small Companies Robert Horrocks, PhD CIO and Portfolio Manager Kenneth Lowe, CFA Portfolio Manager Taizo Ishida Portfolio Manager Lydia So, CFA Portfolio Manager Jodi Morris, CFA, CFP Moderator 2
Is the Asian Economic Growth Story About to Be Tapered? YES cyclically in the short run, it is being tapered NO this cyclical period will not impact Asia s long-term growth 3
Key Takeaways for Today s Roundtable CONCERN SHORT-TERM IMPACT LONG-TERM IMPACT Tapering and Monetary Policy Some impact Neutral GDP Growth Expectations in Asia Moderating Acceptable and expected Debt Levels in Asia Rising, but not necessarily a negative Differentiate good from bad credit growth U.S. Recovery, Rising Corporate Margins; Falling Corporate Margins in Asia Portfolio investment flows into Asia have stalled Does not mean swapping EM (including Asia) for DM (U.S. and Europe) Current Valuations May factor much of short-term concerns in May offer long-term investors somewhat of a floor What is your timeframe? What do you mean by growth? 4
Emerging Markets Have Grown Asian countries have achieved Economic Take Off GDP per capita relative to the U.S. (2010) 1.2 U.S. 1.0 HONG KONG SINGAPORE 0.8 TAIWAN SOUTH KOREA JAPAN 0.6 0.4 Europe MALAYSIA THAILAND U.S. and Canada CHINA Latin America 0.2 Asia INDIA Middle East/Africa 0.0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 GDP per capita relative to the U.S. (1980) Source: Angus Maddison, MICM 5
Determinants of Long-Term Growth GROWTH = INVESTMENT (Savings) + LABOR (Demographics) + PRODUCTIVITY (Skills, Education, Technology) Asia has in spades Asia is mixed Asia is learning or copying Expect Asia s potential long-term growth will be higher than the U.S. and Europe, but in the short run: U.S. and Europe are a long way below potential; Asia is about at potential U.S. and Europe can grow in the short term by increasing demand; Asia needs to increase supply 6
Don t Expect Asia s Short-Term Headwinds to Lead to a Long-Term Rut Current accounts and inflation across Asia Current Accounts (% of GDP) 25% 20% 15% 10% 5% 0% -5% -10% -15% SOME ROOM FOR FISCAL STIMULUS Singapore Taiwan Malaysia South Korea Philippines Hong Kong Japan China Thailand Australia Cambodia TIGHTER MONEY FX APPRECIATION Vietnam Pakistan Bangladesh Indonesia India Sri Lanka -20% -25% LOOSER MONEY FX DEPRECIATION FISCAL AUSTERITY NEEDED 0 5 10 Consumer Prices (Year-on-Year Change) Sources: The Economist and Bloomberg. Data as of 9/17/13 7
Debt Levels Across Asia Much Lower Than Pre-Asian Financial Crisis Gross external debt to GDP (1996 versus 2011) Total Gross External Debt to GDP 70% 60% 50% 40% 30% 20% 10% 0% 1996 2011 1996 2011 1996 2011 1996 2011 1996 2011 1996 2011 China India Indonesia Malaysia Philippines Thailand External public debt/gdp Non-public Source: World Bank 8
Asian Valuations Suggest Emphasis on Short Term Pressures Over Long Term Opportunities Asia ex Japan Valuations (September 1993 September 2013) Forward P/E Ratio 25.0 20.0 15.0 10.0 5.0 Asian Financial Crisis SARS Outbreak Global Financial Crisis P/B Ratio 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.0 Sep 93 Sep 95 Sep 97 Sep 99 Sep 01 Sep 03 Sep 05 Sep 07 Sep 09 Sep 11 Sep 13 Asia ex Japan Forward P/E Asia ex Japan P/B Linear (Asia ex Japan Forward P/E) China Hong Kong India Japan U.S. Forward P/E 9.8x 12.5x 11.8x 14.2x 15.3x Dividend Yield (%) 2.6 2.8 2.1 1.8 1.9 The forward price per earnings ratio ( Forward P/E ) is calculated by dividing the market price per share by the expected earnings per share for 2013. Forward dividend yield is based on consensus dividend per share for 2013 divided by share price. Forward P/E and forward dividend yield table data calculated as of 09/13/2013 using data from FactSet and are forward looking. There is no guarantee that forward P/E and/or forward dividend yield will be realized. Sources: FactSet Research Systems, MICM; Asia ex Japan data as of 09/13/2013 9
What Causes a Debt Crisis? A number of factors differentiate good credit growth from bad credit growth: Current account position External borrowings Inflation rates Standards of bank supervision Longevity Pace of credit expansion Starting credit/gdp ratios 10
Indonesia Philippines India Singapore Vietnam Malaysia Australia China South Korea Thailand Hong Kong Japan European Union OECD Members North America Domestic Credit to GDP has Risen Over the Last Five Years Domestic Credit Provided by Banks Relative to GDP 400% 350% 2007 2012 300% 250% 200% 150% 100% 50% 0% Source: World Bank 11
Asian Financial Systems Generally Liquid and Self Funding GROWTH IN LOANS AND DEPOSITS AND RESULTING LOAN-TO-DEPOSIT RATIOS, 2007 2012 Cumulative Deposit Growth 2007 2012 180% 150% 120% Bubble Size: Loan-to-deposit ratio at end of 2012: Red: >100% Orange: 80% - 100% Green: <80% 90% 60% For observations below diagonal line, loans outpace deposits, and vice versa 30% 0% 0 % 30% 60% 90% 120% 150% 180% Cumulative Loan Growth 2007 2012 Sources: CEIC, IMF Staff Calculations 12
Household and Government Debt Levels Across Asia Largely remain lower than the developed world 13
Matthews Actively Managed Strategies Emphasize Balance Sheet Strength Corporate Financial Strength (Merton Simplified) 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Matthews Aggregate Portfolio * Asian Growth & Income Asia Focus Asia Growth Asia Small Companies Asia ex Japan Asia Pacific Merton Simplified is a calculation used to evaluate the credit risk of a corporation's debt, used in order to determine a company's ability to service its debt, meet its financial obligations and to gauge the overall possibility of bankruptcy. The higher the number, the lower the risk. Asia ex Japan and Asia Pacific data based on FactSet Universe. Calculations are of the largest account in the noted strategy managed by Matthews International Capital Management, LLC. Data as of 9/13/13. *Consists of Matthews 15 strategies. Source: FactSet, MICM 14
South East Asia Foreign Direct Investment (FDI) Increasingly From Within Asia FDI Outflows from North East Asia (US$M) $400 $350 $300 $250 $200 $150 $100 $50 FDI Inflows to South East Asia (US$M) $400 $350 $300 $250 $200 $150 $100 $50 $0 1997 1999 2001 2003 2005 2007 2009 2011 $0 Outflow from North East Asia (Japan, China, Korea) Inflow to South East Asia North East Asia consists of Japan, China, Hong Kong, Taiwan and Korea. South East Asia consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor-Leste and Vietnam. Source: United Nations Conference on Trade and Development. Data as of 12/31/12 15
South East Asia FDI Continues Its Upward Trend South East Asia FDI relative to stock market performance FDI Inflow (US$B) $120 MSCI South East Asia Index Level 1000 $100 $80 Global Financial Crisis 900 800 700 600 $60 $40 Asian Financial Crisis 500 400 300 $20 200 100 $0 1997 1999 2001 2003 2005 2007 2009 2011 South East Asia FDI Inflow MSCI South East Asia Index Level South East Asia consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore Thailand, Timor-Leste and Vietnam. Past performance is not indicative of future results. It is not possible to invest directly in an index. Sources: United Nations Conference on Trade and Development, BNY Mellon Investment Servicing, Bloomberg, MICM. Data as of 12/31/12 16 0
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