The Hang Seng Index, tracking Hong Kong's stock market, recently turned 50 years old. Launched in 1969—two years after Hong Kong's tumultuous political riots of 1967—the Hang Seng Index has been a strong performer, generating annualized returns of 12.76% since inception through November 30, 2019.1 In our current era of trade tensions, political protests and geopolitical risks, it is worth remembering that investment gains have often occurred against a backdrop of political and economic uncertainty.
The lessons of 1969 remain relevant half a century later. As global investors look to Asia, some see only short-term risks. At Matthews Asia, we look beyond the headlines to find long-term opportunities. We believe an objective look at Asia shows that the region may have reached a turning point. While the U.S. has been overstimulated by a decade of quantitative easing and, more recently, tax cuts for the upper classes, Asia remains understimulated and, in our view, primed for growth.
Taking the Long View
Since the start of the millennium, Asia's stock markets have outperformed the U.S., driven by earnings performance, in turn driven by superior economic growth. (See Figure 1.) Why does that seem so surprising to many? Because the conventional wisdom is that the U.S. market has trounced all-comers. And indeed, if one's view is restricted to the past decade, the U.S. has outperformed Asia ex Japan handsomely; for the first 10 years of this century, however, Asia outperformed by an equally impressive amount. That is quite a conundrum and one that any asset allocator should try to understand.
I have argued that the U.S. stock market's performance in the recent past may be less impressive. The U.S. has been willing to sacrifice income equality for the sake of corporate profit margins and a rising stock market. This was the case even before a corporate-friendly tax program was initiated by the current administration. In contrast, Asia's market performance may be less dismal than it seems as policymakers in the region have been unwilling to trade short-term profits for social stability. So Asia goes into the global deceleration with already-lean companies and a valuation advantage. But it is true that the desire of Asia's policymakers to maintain a better balance in society has been weighing on corporate profit growth and on market performance.