It’s Asia’s Turn to Shine In 2014

by Richard Band | December 31, 2013 2:03 pm

By any yardstick, we’re wrapping up an amazing year for the U.S. stock market.  Since January 1, the benchmark Standard & Poor’s 500 index has returned nearly 32% (with reinvested dividends).  As always, though, the question is:  Where do we earn the best profits now?

I’m not ruling out the possibility of another good year for domestic equities.  As I suggested in the January newsletter, the Federal Reserve’s ultra-easy monetary policy—now likely to be continued for at least 12-15 months more—could easily spark an S&P rally to 2000 (perhaps even a bit higher) by this time next year.

However, if the U.S. economy and stock market are really going to be as healthy in 2014 as the bulls insist, it seems almost inevitable that some of the prosperity will spill over into the rest of the world.

Asian stock markets, in particular, should benefit.

This year, most Asian bourses (other than Japan, with its gigantic “quantitative easing” program) have lagged far behind Europe and further still behind the red-hot NYSE.  For example, through December 30, the MSCI All-Country Asia ex-Japan index has produced a meager 3% return, including reinvested dividends.

Yet most Asian economies are growing faster than the United States and will probably keep growing faster than us for decades to come.  Faster GDP growth, in turn, will translate into faster corporate earnings growth.

Thus, the performance gap between U.S. and Asian equities is almost certainly a temporary affair.  Patient long-term investors who take the Asian side of the trade will be richly rewarded.

As we move through 2014, I expect to allocate an increasing percentage of the model portfolio to Asian stocks.  Right now, I want to introduce you to a top-priority pick in that part of the world, a company I call “Asia’s Berkshire Hathaway.”

This mighty conglomerate is Jardine Matheson Holdings (JMHLY[1]).  Incorporated in Bermuda and managed from Hong Kong, Jardine has a finger in a mind-boggling array of businesses.  JM’s Dairy Farm unit operates supermarkets, health-and-beauty stores, 7-11 convenience shops and IKEA furniture outlets.  Dairy Farm also holds a 50% interest in the Maxim’s restaurant group, which controls the Starbucks franchise in Hong Kong.

Hong Kong Land, another big JM subsidiary, owns office buildings and shopping centers.  Mandarin Oriental runs a global chain of luxury hotels.  Jardine Cycle & Carriage, through its Astra unit, builds automobiles and motorcycles in Indonesia, and engages in a variety of other businesses from financial services to mining and agriculture.

Jardine Motors operates car dealerships in Hong Kong, Macau, mainland China and the UK.  Jardine Lloyd Thompson is a London-based insurance broker and employee-benefits advisor.  And I’ve only skimmed the surface!  For a helpful overview of JM’s operations, click here[2].

Like Warren Buffett’s Berkshire Hathaway (BRK.A[3], BRK.B[4]), Jardine manages not for the next quarter but for the very long pull.  (It helps that JM is still controlled by one of the families who founded the company in 1832.)  Reported earnings may be up or down in any given year, but the long-term trend points strongly upward.

Perhaps the best proof of Jardine’s underlying growth trend is the dividend.  Since 2003, the cash payout has quadrupled.  The company normally issues dividends twice a year, in U.S. dollars, so there’s no risk that exchange-rate fluctuations might diminish your paycheck.

Better yet, because Jardine’s dividends originate in Singapore, you don’t have to worry about foreign withholding tax.  (Singapore doesn’t levy any such tax).  At the current share price, JM yields 2.6%—a welcome contrast to Buffett’s zero-dividend policy.

What a great value, too.  In a world where most blue chip stocks are expensive, some ridiculously so, Jardine is trading at only 1.06 times book value—a 24% discount to Berkshire.  Bought at the right price, this is the type of investment you can lock up and throw away the key.

Happy New Year!

  1. JMHLY:
  2. here:
  3. BRK.A:
  4. BRK.B:

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