No investor can deny the obvious benefits of foreign stocks in 2009. As the dollar crumbled to test multi-year lows and the financial crisis wrecked American banks, international markets experienced nothing but a tidal wave of investment, as money poured out of developed nations and into economically viable emerging markets. With the international markets sailing and the US and European economies in the doldrums, one should only expect that the international markets will continue to grow.
Is it Too Late to Invest in Asia?
Many investors may have missed the international boat, failing to jump ship from the developed world into emerging economies. With one half of the profit element, currencies, already seemingly at their bottom, it appears that many investors may not enjoy the full benefit of moving overseas. However, despite the significantly higher prices for equities, the international markets still have some flair.
The Case for China
Despite the recent entry into a bear market, China’s success is lamented by its ability to export goods to the rest of the world. Unfortunately, the countries that were once its leading purchasers of goods have slowed down in their buying, with a credit contraction appearing all over the world. Investors will have to pay a premium for Chinese stocks, as much of the successful Chinese stimulus package went directly to the equity markets. The infusion of cash created a quick bubble in China, but the prosperous elements of their economy remain, albeit at significantly higher prices.
Can China Still Grow?
It seems now that China will ultimately have to find a new revenue stream to replace its ailing exports. Luckily, that source is right in front of their eyes: the Chinese people. Having already built a near monopoly on the export of goods, China remains in a solid position to continue its fortunate trade imbalance while creating growth from internal consumption. In the first half of the year, spending within China rose by 8.9%, fueling the growth that sent China’s stock markets to rise to the tune of 90% percent in just one half of 2009.
To Time or Not to Time
Clearly, Chinese equities are now 20% less expensive than they were even one month ago. This presents some buying opportunities, but it also leaves the door open for momentum trading in which the market continues to break down. The timely investor may be more willing to wait before entering the market, hoping to get the best companies even cheaper. However, investors facing long term investment decisions should opt to buy now at levels still considerably cheaper than just one month ago and relish in the fundamentals that exist at virtually any price.
How to Get a Pure Play on China
To get a pure play on the economic fundamentals of China, you should seek companies that first produce profits in mainland China, and second, are not susceptible to shifts in the global market. For instance, the difference between a Chinese oil company and an American oil company are nonexistent because the price is determined worldwide. There is no particular advantage to any particular country. Instead, you should seek out companies that derive profits from consumer spending. Consumer products traditionally come with higher profit margins and ultimately build wealth within China.
Vietnam Can’t Be Discounted
Vietnam is often not found on the global investing radar, but the country has the same fundamentals driving it as many of the Asian superstars. The economy, which is largely agriculture and manufacturing, generates billions of dollars annually for its exports. As a society, the country is just as endowed. More than half of the Vietnamese population is under the age of 25, prime for decades of future work to drive the nation.
Limited Short Term Growth
Both nations require a continuous growth in exports in order to grow. Though internal consumption in China and Vietnam is growing, neither country derives enough revenue from internal consumption to grow their economy. For much of the Asian manufacturing world, growth will not return until a global rebound occurs. That rebound will have to be lead by Europe and the United States, which have drastically cut their Asian imports since the financial crisis began.
The Changing Currency Tide
The US dollar growing weaker is promising for Chinese stocks; however, investors must also be considerate of the growing strength of the yuan. Without question, economists and analysts alike have considered the yuan to be grossly overvalued. Though China has taken some steps, including a shift to a basket of currencies, its manufacturing powerhouse requires an incredibly cheap yuan to keep export orders flowing. A strengthening yuan, however, does pay off when you bring your Chinese stock money back home, but should the yuan further appreciate while the dollar depreciates, the export potential of China’s manufacturing centers could be limited.