Monthly Salary in Manufacturing Sector of Select Asian Countries

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China used to be known as the “factory floor” of the world a few years ago as the country’s manufacturing industry was attractive to companies from the developed world due to cheap labor costs. However that is no longer the case. Wages in China have been steadily increasing making some manufacturers look for alternative cheaper locations. For example, in 2016 I wrote an article on the comparative wages in the automotive industry for select countries. At that time, the average hourly wage was $5.19 in China compared to $3.29 in Mexico and nearly $24 in the US.

According to research by CLSA, the average monthly salary in the manufacturing industry in China is $424. Many Asian countries have lower monthly salaries than in China as shown in the chart below:

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Source:How ASEAN’s 3Rs Can Overcome Trade Wars, Nikko AM

Asian economies such as Indonesia, Vietnam, etc. have competitive advantages over China in the manufacturing industry. Rising wages in China may lead some firms moving their facilities to these low wage countries to remain competitive in the global marketplace.

Schwab Asset Class Quilt 2018

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The performance of various asset classes vary in any given year. For example, bonds earned higher returns than stocks during the dark periods of Global Financial Crisis(GFC) in 2008 and 2009. Similar to the diversification benefits across countries, it is also important to diversify across many asset classes such as small caps, mid caps, large caps, bonds, treasuries, etc. The following chart from Schwab shows how different assets have performed over the years since 2008 and how a diversified portfolio can help smooth out a portfolio returns:

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Source: Morningstar Direct and the Schwab Center for Financial Research. Data is from January 1, 2008, to December 31, 2017. Asset class performance represented by annual total returns for the following indexes: S&P 500® Index (U.S. Lg Cap), Russell 2000® Index (U.S. Sm Cap), MSCI EAFE® net of taxes (Int’l Dev), MSCI Emerging Markets IndexSM (EM), S&P United States REIT Index and S&P Global Ex-U.S. REIT Index (REITs), S&P GSCI® (Commodities), Bloomberg Barclays U.S. Treasury Inflation-Protection Securities (TIPS) Index, Bloomberg Barclays U.S. Aggregate Bond Index (Core Bonds), Bloomberg Barclays U.S. VLI High Yield TR Index (High Yld Bonds), Bloomberg Barclays Global Aggregate Ex-USD TR Index (Int’l Dev Bonds), Bloomberg Barclays Emerging Markets USD Bond TR Index (EM Bonds), Bloomberg Barclays Short Treasury 1–3 Month Index (T-Bills).

The diversified portfolio is a hypothetical portfolio consisting of 18% S&P 500, 10% Russell 2000, 3% S&P U.S. REIT, 12% MSCI EAFE, 8%, MSCI EAFE Small Cap, 8% MSCI EM, 2% S&P Global Ex-U.S. REIT, 1% Bloomberg Barclays U.S. Treasury, 1% Bloomberg Barclays Agency, 6% Bloomberg Barclays Securitized, 2% Bloomberg Barclays U.S. Credit, 4% Bloomberg Barclays Global Agg Ex-USD, 9% Bloomberg Barclays VLI High Yield, 6% Bloomberg Barclays EM, 2% S&P GCSI Precious Metals, 1% S&P GSCI Energy, 1% S&P GSCI Industrial Metals, 1% S&P GSCI Agricultural, 5% Bloomberg Barclays U.S. Treasury 3¬–7 Yr. Including fees and expenses in the diversified portfolio would lower returns. The portfolio is rebalanced annually. Returns include reinvestment of dividends, interest and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Source: Why Global Diversification Matters by Anthony Davidow, Charles Schwab

Why Diversify Internationally?

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One of the easiest and simplest diversification strategies is to diversify across borders.Since the performance of equity markets varies across countries in any given year, an investor can boost their returns by spreading their assets across many countries. For example, emerging markets that are highly dependent on commodity exports perform well when commodity markets boom. By diversifying between developed markets and these emerging markets, investors can earn higher returns.

In addition, no one country’s equity market is the top performing market year after year. For example, Canada was the best performer in 2016 but ended up being the worst in 2017 due to decline in energy prices.

The following quilt from Schwab shows the importance of allocating assets across countries:

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Source: Why Global Diversification Matters by Anthony Davidow, Charles Schwab