Morningstar Advisor - October/November 2009 - 50

Morningstar Conversation Matthews Asian Growth and Income MACSX $20K 15 MSCI EAFE GR 10 was so strong. People under-appreciate the fact that both domestic consumption and domestic investment account for more than two thirds of the growth in the Chinese economy. My own research there has shown that there’s a great deal of consumption still taking place. Still, the pace of the investment that’s being spurred by government stimulus is a big concern. China’s been quite successful at stimulating its economy in a way that most other economies around the world would be quite jealous of. That said, China does need to do more to boost domestic consumption. It has been growing at a very rapid rate, just not as fast as the economy as a whole, and as a consequence, the percentage of the economy that is driven by consumption is lower than everyone would like to see. Dutta: Arjun, are you worried about the numbers coming out of China? Divecha: Yes. Going into the crisis we were worried about overinvestment. Our belief is that overinvestment inevitably leads to low return. It may lead to high top-line GDP growth, but that doesn’t mean that it leads to high returns for investors. Clearly, the stimulus has had its desired effect in terms of stimulating more consumer behavior and all kinds of good things short term. But we think that the stimulus has really had a profound impact on overinvestment. Let me put it this way: If the banks did not have a bad loan problem going into the crisis, they will almost certainly have one a year or two from now, because a lot of the lending that is being done is not good-quality lending. Johnson: I share these concerns. China’s made way there; you don’t build it overnight. If you build a new cement plant or a road, it has a more immediate impact on your GDP, but I think they’re going to try to move toward the softer-side services and a moredomestic economy. Foster: I went to China in May to tour some Category Pacific/Asia ex-Japan Stock Morningstar Rating Expense Ratio (%) 1.16 5-Yr Anl Total Rtn (%) 11.45 5-Yr Anl TR % Rank Cat 86 QQQQQ Minimum Investment $2,500 Data as of Aug. 31, 2009. of the banks, because everyone around the world was a bit breathless over this pronounced extension of credit in China. I think the system itself is quite liquid and solvent and can digest this in the short run. There’s really no strain being put on China’s banks. They’re still running with loan and deposit ratios under 70%, because there’s been an enormous amount of deposit creation alongside this credit extension. The bigger issue that Rusty was hinting at is how productive is the investment going to be, and it does seem to be channeled to state entities for infrastructure projects. We, too, have some concerns over how productive this will be and whether or not, when the loans come through in five and 10 years time, the projects will have earned a reasonable rate of return on capital. It looks like the state in most instances is a guarantor behind these projects, because they are of an infrastructure bent for the most part. In that respect, China’s fiscal position is incredibly healthy compared with most other governments around the world. Dutta: Has the crisis caused any major structural changes in emerging markets? Johnson: Well, one area is banking. There’s Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 ChinaSep-05Feb-06 Jul-06 Dec-06May-07Oct-07Mar-08Aug-08 Feb-09 Jul-09 Feb-05 Jul-05 Dec-05May-06Oct-06reallySep-07Feb-08 Jul-08 Dec-08May-09 Mar-05Aug-05 Mar-06Aug-06 Feb-07 Jul-07 Dec-07May-08Oct-08Mar-09Aug-09 Apr-05 Oct-05 IndiaSep-06 Mar-07Aug-07 Apr-08Sep-08 Apr-09Sep-09 May-05and Apr-06 are Apr-07 small, Jun-08Nov-08 Jun-09 Jun-05Nov-05 Jun-06Nov-06 Jun-07Nov-07 especially the corporate bond markets. As a consequence, the pools of capital that could help see these countries through a retrenchment in credit elsewhere in the world essentially dried up. That’s why we saw the destruction we did. Capital markets now are picking up steam, which will help emerging markets ride out some of the global shocks in the future. Dutta: Some of the data coming out of China have been astonishing. We’re hearing that a lot of these growth statistics are being driven by investment and government spending and that it’s going to create a lot of overcapacity. Do you agree? Foster: The big shocker of the year has been that China’s growth has held up remarkably well despite the fact that its export engine is out of commission. Some economists are predicting that China might even have monthly trade deficits. I’m not sure if it will go quite that far, but exports are contributing almost nothing to the economic growth there. But China’s last quarterly GDP figure was a 7.9% expansion year on year. That was a big shock to everyone. We’re not surprised to see that the domestic side of the economy it clear that they’d like to see a betterbalanced economy. I don’t think they like to be so dependent on export because it brings in a whole range of external issues, politics, and what have you. They understand clearly that they want to get a deeper base of a consuming society. They’re working their been a big change in global banking, and emerging-market banks are the big beneficiaries. By and large, the emerging-markets banks are demonstrably healthy, as Andrew mentioned. They’re almost exactly opposite of what Western banks are. They had good lending opportunities, they had ample spreads, they were funded by domestic deposits, and they are without a large degree of external lending, without a lot of leverage and 50 Morningstar Advisor October/November 2009

Morningstar Advisor - October/November 2009

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2009

Morningstar Advisor - October/November 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
How Do You Use Behavioral Finance in Your Practice?
Investing in the Moment
Investment Briefs
How the Best Large-Cap Managers Rise Above the Rest
Don’t Give Up on Stocks Just Yet
Makeup of the Mind
A Top-Down Approach
In Practice: Patterns of Investor Irrationality
A Call for Nudges
The Furious Comeback of Emerging Markets
Junk-Bond Pioneer
Four Picks for the Present
Consumer Staples Hold Up in the Kitchen
Familiarity Can Breed Bad Investment Decisions
Leave the ‘Junk Rally’ Behind and Look for Quality at a Reasonable Price
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
New at Morningstar
Meet the New Boss, Same (School) as the Old Boss
Morningstar Advisor - October/November 2009 - Morningstar Advisor - October/November 2009
Morningstar Advisor - October/November 2009 - Cover2
Morningstar Advisor - October/November 2009 - 1
Morningstar Advisor - October/November 2009 - 2
Morningstar Advisor - October/November 2009 - Contents
Morningstar Advisor - October/November 2009 - 4
Morningstar Advisor - October/November 2009 - 5
Morningstar Advisor - October/November 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2009 - 7
Morningstar Advisor - October/November 2009 - 8
Morningstar Advisor - October/November 2009 - Letter from the Editor
Morningstar Advisor - October/November 2009 - Contributors
Morningstar Advisor - October/November 2009 - 11
Morningstar Advisor - October/November 2009 - How Do You Use Behavioral Finance in Your Practice?
Morningstar Advisor - October/November 2009 - 13
Morningstar Advisor - October/November 2009 - 14
Morningstar Advisor - October/November 2009 - Investing in the Moment
Morningstar Advisor - October/November 2009 - 16
Morningstar Advisor - October/November 2009 - 17
Morningstar Advisor - October/November 2009 - 18
Morningstar Advisor - October/November 2009 - Investment Briefs
Morningstar Advisor - October/November 2009 - 20
Morningstar Advisor - October/November 2009 - 21
Morningstar Advisor - October/November 2009 - How the Best Large-Cap Managers Rise Above the Rest
Morningstar Advisor - October/November 2009 - 23
Morningstar Advisor - October/November 2009 - 24
Morningstar Advisor - October/November 2009 - 25
Morningstar Advisor - October/November 2009 - 26
Morningstar Advisor - October/November 2009 - Don’t Give Up on Stocks Just Yet
Morningstar Advisor - October/November 2009 - 28
Morningstar Advisor - October/November 2009 - 29
Morningstar Advisor - October/November 2009 - Makeup of the Mind
Morningstar Advisor - October/November 2009 - 31
Morningstar Advisor - October/November 2009 - A Top-Down Approach
Morningstar Advisor - October/November 2009 - 33
Morningstar Advisor - October/November 2009 - 34
Morningstar Advisor - October/November 2009 - 35
Morningstar Advisor - October/November 2009 - 36
Morningstar Advisor - October/November 2009 - 37
Morningstar Advisor - October/November 2009 - 38
Morningstar Advisor - October/November 2009 - 39
Morningstar Advisor - October/November 2009 - In Practice: Patterns of Investor Irrationality
Morningstar Advisor - October/November 2009 - 41
Morningstar Advisor - October/November 2009 - 42
Morningstar Advisor - October/November 2009 - A Call for Nudges
Morningstar Advisor - October/November 2009 - 44
Morningstar Advisor - October/November 2009 - 45
Morningstar Advisor - October/November 2009 - 46
Morningstar Advisor - October/November 2009 - 47
Morningstar Advisor - October/November 2009 - The Furious Comeback of Emerging Markets
Morningstar Advisor - October/November 2009 - 49
Morningstar Advisor - October/November 2009 - 50
Morningstar Advisor - October/November 2009 - 51
Morningstar Advisor - October/November 2009 - 52
Morningstar Advisor - October/November 2009 - 53
Morningstar Advisor - October/November 2009 - 54
Morningstar Advisor - October/November 2009 - Junk-Bond Pioneer
Morningstar Advisor - October/November 2009 - 56
Morningstar Advisor - October/November 2009 - 57
Morningstar Advisor - October/November 2009 - Four Picks for the Present
Morningstar Advisor - October/November 2009 - 59
Morningstar Advisor - October/November 2009 - 60
Morningstar Advisor - October/November 2009 - Consumer Staples Hold Up in the Kitchen
Morningstar Advisor - October/November 2009 - 62
Morningstar Advisor - October/November 2009 - 63
Morningstar Advisor - October/November 2009 - Familiarity Can Breed Bad Investment Decisions
Morningstar Advisor - October/November 2009 - 65
Morningstar Advisor - October/November 2009 - Leave the ‘Junk Rally’ Behind and Look for Quality at a Reasonable Price
Morningstar Advisor - October/November 2009 - 67
Morningstar Advisor - October/November 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2009 - 69
Morningstar Advisor - October/November 2009 - 70
Morningstar Advisor - October/November 2009 - 71
Morningstar Advisor - October/November 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - October/November 2009 - 73
Morningstar Advisor - October/November 2009 - Undervalued Stocks
Morningstar Advisor - October/November 2009 - 75
Morningstar Advisor - October/November 2009 - 76
Morningstar Advisor - October/November 2009 - 77
Morningstar Advisor - October/November 2009 - 78
Morningstar Advisor - October/November 2009 - New at Morningstar
Morningstar Advisor - October/November 2009 - Meet the New Boss, Same (School) as the Old Boss
Morningstar Advisor - October/November 2009 - Cover3
Morningstar Advisor - October/November 2009 - Cover4
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