FALLS CHURCH, Va.–The US is struggling to find the right approach to deal with its economic problems and rapidly deteriorating growth rates; there’s not a lot of success to be reported on that front yet. But the rest of the world, particularly the developing world, faces a different kind of problem: too much growth.

Asia is a peculiar case. Growth rates are strong, and at the same time the region’s economies are maturing into major players in international trade. Asia has big exposure to the developed economies of the world, so hard-hit US and European economies would mean disaster for the region.  

One of the pillars of my investment thesis is that the 1998 Asian Crisis has proven to be a learning opportunity for Asian economies. In the 10 years since, Asian economies and companies have dramatically improved the way they analyze growth and conduct business.

Asia was still working through the excesses of the 1998 crisis when the 2001 recession hit; its economies weren’t prepared to deal with that blow. Today, however, Asian economies and companies are much better prepared. The region is cash-rich, and its financial institutions have relatively limited exposure to US subprime debt.

Although exports remain extremely important to the region, Asia’s economies have focused attention on developing its domestic capabilities through improvements in infrastructure and property.

While most observers emphasize the deterioration of the US economy and the problems it will cause to the rest of the world, Chinese authorities are seeking ways to prevent their economy from overheating.

A substantial slowdown in Europe and the US could do their work for them. As exports slow from elevated growth levels, which are currently around 26 percent, Asian economies will avoid overheating. Remember that China and India were the least affected economies in the 2001 recession, and given their economic improvement since, they’ll be spared this time around, too.

China has an increasingly improving domestic demand story. Retail sales climbed 18.8 percent to RMB810.5 billion (USD110 billion) in November from a year earlier, after rising 18.1 percent in October. This is the quickest pace in the last eight years.

And if the global economic situation becomes extremely weak, China has the financial muscle to boost its domestic economy, especially in the short term. The country’s government debt is only about 18 to 20 percent of GDP, which means that a lot can be accomplished without straining the system.

Source: Bloomberg

Domestic demand represents 36 percent of China’s GDP, which is quite small compared to that of India or the US. But China’s working toward improving its domestic demand situation, and higher growth will follow.

One of the areas that will see growth is the disposable paper hygiene product (DPHP) market. China’s DPHP market is the second-largest (after the US) and third-fastest growing in the world.

I recommended Hengan International (Hong Kong: 1044, OTC: HEGIF) at the start of the year as a play on this theme. The stock is up 65 percent, but it’s still a good way to gain exposure to a growing sector. 

Established in 1985, Hengan is the largest sanitary napkin manufacturer and the second-largest disposable baby diaper manufacturer in China; it’s also a leading producer of high-end tissues. Overall, it’s the largest local DPHP player in China. Hengan started making sanitary napkins in China in the early 1990s basically creating the market, and built a strong brand name and distribution network.

The main growth engine of the company is its diaper division. Diaper demand, driven by demographic change and rising living standards, is on the rise. But penetration is still low, indicating strong growth potential.

Disposable diapers have been available for 20 years in China, but industry growth has picked up to 40 percent–60 percent in Hengan’s case–during the last couple years as young parents in urban areas see their incomes rising.

Hengan is a strong brand name in China, and branding is very important to the Chinese consumer. For instance, Hengan sells its tissues at a 5 percent premium over its larger competitors (premiums are much larger over smaller competitors), indicating both brand and quality leadership. The company has developed an excellent distribution network, and none of its competitors offers a full range of sanitary napkins, diapers and tissues.

The company delivered solid half-year results, despite the surge in raw materials (mainly wood pulp prices) and strong competition. Things could get even better if pulp prices weaken and global economic slowdown becomes more pronounced. Hengan International remains a buy.

Source: China National Household Paper Industry Association

Fresh Money Buys

Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio pages on the left-hand side of your screen for details.

• Singapore (banking, telecommunications, industrial)
• South Korea (electric power, banking)
• Hong Kong (real estate, banking, infrastructure, publishing)
• India (pharmaceuticals)
• Russia (energy, telecommunications)
• China (consumer, coal, e-commerce, oil, water, power)
• The Philippines (telecommunications, real estate)
• Malaysia (ETFs)
• Taiwan (technology, telecommunications)
• Europe (industrials, communications equipment)
• Japan (banking, industrials)
• Macau (gaming)