Most investors will probably look at the recent performance of Asian stocks and run screaming, but some industry experts recommend that they stand pat.
They admit, however, that it won't be easy.
Mutual funds that invest in Asian stocks were down an average of 40.35% year-to-date as of last Monday, according to Morningstar Inc. of Chicago.
No other fund category was as deep into negative territory.
Investors, however, should keep in mind that "markets can adjust and even recover," said Andrew Foster, acting chief investment officer at Matthews International Capital Management LLC of San Francisco.
And Asia is more close to recovery than it has been, he said.
"Valuations are on the lower side of history," Mr. Foster said. "We wouldn't say valuations represent a market bottom, but we're more close to a bottom than a top."
That is one reason that Matthews reopened two of its funds to new investors Sept. 2: the $1.76 billion Matthews Asian Growth and Income Fund (MACSX) and the $2.59 billion Matthews Pacific Tiger Fund (MAPTX).
NEW FUND
The funds, both launched in 1994, had been closed to new investors since Nov. 28, 2003, and June 7, 2006, respectively.
Matthews also launched a new fund — the Matthews Asia Small Companies Fund (MSMLX) — Sept. 15.
Lower valuations, however, have less to do with the fund's launch than Matthews' belief that Asian markets have become deeper and more liquid, Mr. Foster said.
It may not be a bad idea for investors to get in on the ground floor of such a fund.
Because valuations have fallen, Asia represents a "buying opportunity," said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. LLC in Jersey City, N.J.
He added: "The fundamentals [in Asia] look better than in the United States."
That may be true, but it is still be too soon to invest in Asia, said Chip Hanlon, president of Delta Global Advisors Inc., a Huntington Beach, Calif.-based firm with $1.5 billion in advised assets.
"I suspect they are probably a bit early," he said about investors considering Asia.
Asia stock valuations may indeed head lower, Mr. Foster conceded.
Asian countries have a problem in that Asian currencies are pegged to the U.S. dollar, meaning that the dollar's problems are their problems, he said.
"It will create more volatility in the region," Mr. Foster said.
But that doesn't mean that Asia will move in lockstep with the United States.
Asian financial stocks tanked when Lehman Brothers Holdings Inc. of New York filed for bankruptcy protection last week.
But that sell-off was an overreaction, Mr. Foster said.
"There are some [Asian financial companies] that don't have exposure to the U.S. but sold off dramatically," he said. "They sold off in sympathy to the U.S."
And because of that, they represent a buying opportunity, Mr. Foster said.
Financial issues, however, aren't the only Asian stocks that are attractive, he said.
Consumer stocks and those of companies involved in building and maintaining infrastructure — particularly in India — also look attractive, Mr. Foster said.
"The region is far more diversified than it used to be," he said. "It's beginning to trade with itself far more than it has in the past."
That doesn't mean that Mr. Foster doesn't have any worries; they just don't necessarily involve market fundamentals.
"When I look across Asia, one of the things that concerns me the most is good, old-fashioned political risk" — particularly political risk involving Pakistan, North Korea and China, he said.
Barring political catastrophe, however, Mr. Foster predicted that Asian markets could actually rebound faster than the U.S. market.
That leaves investors with a decision to make.
DIVERSIFICATION KEY
If they believe what Mr. Foster and others say about Asia, how should they invest in the region?
"The watchword is 'diversification,'" Mr. Ezrati said. "Any one country or one area can suffer horribly."
That doesn't mean that a fund that invests in Asia alone is inappropriate, Mr. Ezrati said.
"If you think that Asia has more promise, you may want to emphasize that by choosing an Asian fund," he said.
Just make sure it is part of a well-diversified portfolio with funds that give investors access to other countries, Mr. Ezrati said.
E-mail David Hoffman at [email protected].
