I’ve been grappling with the recent political changes in the U.S. and wondering whether they demand a radical rethink of investment strategy. I have come to the conclusion that the answer is no. The current climate feels like one of confrontation—and why invest in Asia in this age of confrontation? It’s easy to get sucked into the political climate and forget the fundamental facts of economic growth. So, although political parties in Europe, the U.K. and the U.S. seem particularly polarized—with nationalism, anti-immigration, protectionism and mercantilism still dominant themes in attracting votes—there are some things that these trends can’t change, such as Asia’s savings, productivity and growth.

Late last year, my colleague Andy Rothman and I addressed some of these issues as they affect Asia, and particularly China, during a U.S. roadshow as well as via webcast. I expect that much of the coming weeks and months may involve communicating our views on long-term investing in Asia in the face of sensational headlines and, at times, bleak sentiment, driven by changes of course in U.S. policy.

But beyond what we may personally feel about politics, what are the effects on economies as some of the world’s largest economies turn inwards? How should we think about this? There are obviously lots of currents and sub-currents we could discuss and plenty of opportunity for volatility in the coming weeks and months. But I want to focus on three aspects. Hopefully, these will bring to light the opportunities inherent in Asian investing in the face of any market sell-downs.

First, we really must stop thinking of Asia as being driven by exports, or by the economy of the U.S. Asia is far too large to truly be driven by anything other than its internal dynamics. Exports are not insignificant, but they are a secondary concern. I believe that growth depends on the desire and ability of people to work hard, learn and better their standards of living. This desire remains unchecked in Asia. Opportunities, too, regardless of any trade issues, remain plentiful in the domestic economies. Over the long term, thrift, productivity and reform—those are the things that count. Second, the actual confrontation that we see (challenges that Asia’s labor force may face from U.S. political populism) may actually work in favor of investors in Asia. Let’s look at the long-term internal drivers of Asian economic growth and then the reasons behind recent disappointing earnings performance in Asian corporates. Then maybe we can discern a brighter future ahead. We may see stronger overall growth in the Asian region for one thing and a distribution of that growth that may be more favorable to corporates than it has been in the immediate past. Third, confrontation also means less correlation, and the attractiveness of international assets rises.

Correlations

Let’s take the last point first. Even in the rhetoric of confrontation, the international investor can see a silver lining. For, where we can find growth at low correlations to our home investments, we should be especially excited. The shift in correlations has been palpable in recent weeks, compared to 10-year averages. So, even as the changes in tone and policy are potentially affecting the global economy, they are surely already impacting the way that markets move. For Asia is now showing little or no correlation with the U.S. Is this the way that international markets will evolve—with the U.S., Europe and Asia each increasingly dancing to their own tune? That may be expecting too much too quickly. But it is something to monitor.

The markets clearly seem to be de-linking Asia and the U.S. to an extent. And that is not too far removed from the rhetoric of recently elected President Donald Trump: “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.” So, what are the effects on economies as some of the world’s largest economies turn inwards? How should we think about this?

Agree or not with the analytical framework behind the recent trade rhetoric, sentiment over the U.S. dollar is strong and seems pervasive in the new U.S. administration. To those that focus just on the past five years, it seems a bizarre thing to say—U.S. company results have outperformed Asia over that time period. But is that the true trend or just a short-term blip? To put things in context, the next part of our three-part series on this topic will examine the long term.

By Robert Horrocks PhD, Chief Investment Officer, Matthews Asia

Enterprise value to Earnings Before Interest and Tax (EV/EBIT) is a measurement to whether a share in a company is cheap or expensive, relative to competing firms or the wider market.

Price-to-Earnings Ratio (P/E Ratio) is a valuation ratio of a company’s current share price compared to its per-share earnings.

Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested, and is calculated as net income divided by shareholder’s equity.

Return on Invested Capital (ROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns.


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Investments involve risk. Past performance is no guarantee of future results. 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.