In recent years, many Asian economies have been booming while European and North American ones struggle. But the tables might be about to turn, according to data from the Asian Development Bank.
In its July 2012 Asian Development Outlook Supplement, the financial and policy institution forecasts 6.6% GDP growth in the region, down from 7.2% in 2011. The forecast also represents a downward revision from the ADB's initial 2012 GDP growth estimates of 6.9% in July for the 44 Asian countries that belong to the bank.
The translation is that things seem to be slowing down in Asia. But why? The answer is lower demand for Asia's exports and unwinding policy stimulus programs in the region. In short, consumers have less money to spend in Asia.
Many investors might take this as a cue to move toward stocks that rely on U.S. consumers for growth, but be careful: many All-American stocks actually rely on revenue from Asian consumers, though you wouldn't really know it. Here are a few:
1. J.M. Smucker Company (NYSE: SJM)
This classic American food brand is more than just jelly on your toast; Smucker also owns many food brands America has grown up with: Folgers, Dunkin' Donuts, Jif, Crisco, Pillsbury, Eagle Brand and Hungry Jack are just a few. But what you might not know is that J.M. Smucker is making a huge investment in the Chinese oatmeal business.
On March 26, 2012, the company bought a 25% interest in Guilin Seamild Biologic Technology Development Co., Ltd., a privately owned manufacturer and marketer of oats products headquartered in the Guangxi province of China, for $35.9 million. The purchase comes with two manufacturing facilities in southern China and a third on the way. In 2013, the deal isn't expected to influence Smucker's revenues, which topped $5.5 billon last year, but the company doesn't expect that to be the case for long. "This transaction represents an exciting first step as we look to develop a meaningful presence in China over time," said Richard Smucker when the deal was announced.
2. Aflac (NYSE: AFL)
Aflac is a well-known provider of supplemental insurance policies that are designed to fill the coverage gaps in health insurance policies, but who knew the Aflac duck spoke Japanese? The company’s revenues were $5.3 billion in the United States last year, and with many of the major components of health care reform taking effect in the next two years (and a famous duck at the core of its North American marketing campaign), the company has received a lot of attention lately.
But what few people know is that Aflac is huge in Japan -- at $18.4 billion, its revenues there were almost three times higher in 2011 than they were in the United States. Japan's aging population is only bringing more attention to managing health care costs, which is one reason the company is Japan's largest life insurer and the largest seller of cancer policies. Thanks to the company's 120,700 licensed Japanese sales associates and its sales agreements with 90% of the country's banks, the Japanese consumer is likely to determine the fate of this American company. Similarly, deregulation in Japan has brought an onslaught of competition in recent years, and the company took a short-term hit during the Fukushima nuclear disaster.
3. Avon (NYSE: AVP)
The Avon Lady has long been a traditional fixture of the American neighborhood, but this all-American brand is becoming more dependent on the shopping habits and fashion trends of Chinese women.
In 2010, the company built an R&D facility in Shanghai after the Chinese government lifted a ban on direct selling, but the slowdown in the growth of disposable income in the country may be having an effect -- Avon's revenues in China declined 35% and 20% in 2010 and 2011, respectively. There's also no telling whether the government will change its mind about its permission to direct-sell, but given that Avon recorded almost $1 billion of revenue in the country last year ($942.4 million, to be exact), the company has about 10% of its business in Asia. This means the company may find itself increasingly reliant on serving Asian beauty trends and ideals.
4. Lionsgate Entertainment (NYSE: LGF)
One of America's most legendary exports is Hollywood, but the appetites of Asian audiences are undoubtedly having a bigger influence on what Hollywood will become.
Lionsgate, which makes and distributes movies and TV shows, formed a partnership in early 2010 with two other production companies to form Celestial Tiger Entertainment -- a venture that creates content and operates cable channels for customers in Hong Kong, Singapore, Thailand, Vietnam, the Philippines, Malaysia and other parts of Asia. The venture just began the first national Pay-per-View and video on demand platform in China. As of March 31, 2012, the venture wasn't profitable, but Lionsgate and other companies like it are increasingly aware that the future of the entertainment business is largely dependent on the tastes of Asian markets with more and more disposable income to devote to television and movies.
5. The Coca-Cola Company (NYSE: KO)
Coca-Cola is one of the most valuable brands on the planet and soda is one of the most-consumed beverages in the world, but the Asian beverageis as competitive as ever. And with less disposable income, consumers in the region may be trading down.
It's a tricky situation: sales in Coca-Cola's Pacific region grew from $4.9 to $5.8 billion since 2009, much of which was because of double-digit sales in China. At about 12% of total sales in 2011, the region represents the company's second-largest market (after North America), making it even bigger than Europe. That share has been falling, however -- Pacific used to represent about 14% of Coca-Cola's sales. Margins from this segment are also falling: 39.4% versus 41% to 42% in 2010 and 2009, respectively. In addition, sales in Japan have been flat, and sales in the Philippines were down 9% last year.
The Investing Answer: We can't tell you what’s right for your personal portfolio, but what we can tell you is that you can't ignore Asia if you’re a long-term investor. Companies can’t ignore Asia either, which is why you should always be sure to understand the geographic dependencies of every company you invest in. In annual and quarterly filings, look beyond the income statement, balance sheet and statement of cash flows. Read the notes, and pay special attention to the sections that report operations by segment -- they will often include a break-out of performance by region or show how divisions in certain geographic regions are doing. It's in those disclosures that you might discover just how much your non-Asian stock picks depend on Asia after all.
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