Outlook 2008: Four Safe Picks in the Volatile, but Promising Asia Market

Editor's Note: This is the 15th Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Following a spectacular run up last year, many investors are wondering what's next in Asia.

We are, too.

The steady stream of news so far this year has only seemed to make things worse. And the current market volatility, which began with last summer's U.S. credit crisis, seems set to derail U.S. economic growth. Throw higher oil prices, inflationary concerns and a dollar that's turning out to be more like Rodney Dangerfield than Sean Connery into the mix, and you've got what seems to be a real mess.

Fortunately, though, if you take a look behind the headlines, Asian markets are holding up just fine and, although they are likely to continue to be volatile during 2008 [along with the rest of the world's markets], they're full of promise for decades to come.

Much of that promise is obviously due to the region's growth. But increasingly, it's also a function of the combined strength of the area…as it relates to China.

A Repeat Performance with a Different Star

If this sounds familiar, it should. For the 50 years immediately following World War II, the region centered on Japan. And investors who went along for the ride went straight to the top on the back of a Nikkei exchange and regional trading alliances that knew no downside…until the late 1990s when the bottom dropped out.

As usual, those who were focused on the short-term got badly burned and have yet to recover, with the Nikkei still trading at merely a quarter of where it was at its peak. Alternatively, safety-focused investors who made intelligent choices did well.

Today, Asia faces a similar situation only this time with China at the helm. And many investors are sitting at a similar cross roads. Like Japan before it, China has experienced a whopping run-up, which makes it all the more tempting for people who missed that initial surge. But China is a riskier investment than ever before.

This combination makes us suspect that now is the time to get serious.

Balancing Risk and Returns

There's no question the region will continue to grow for decades. Yet, in contrast to the record growth of the past few years, which was driven largely by speculative liquidity, the longer-term growth in the region will increasingly be China-centric.

To cash in, investors will have to do two things:

  • Make smarter, "safety-first" choices that diversify - and don't concentrate - risk.
  • And limit investment choices to companies that are poised to capitalize on international exposure in the region.

Here's why.

Large-cap companies, particularly those with global operations, can build business within the region - and with far less risk than those local companies engaged exclusively in a domestic-focused business. This helps ensure stability. Plus, many of these companies pay dividends, which are vitally important at the moment, because they help offset the elevated risks we take when we invest in the China region.

Further, by concentrating on the so-called "Global Titans" doing business in the region, we mitigate a "split-personality problem" that eventually will end up clobbering most investors who don't adopt the safety-first philosophy we advocate.

I've been involved with Asia investments for more than two decades. And I've seen it time and again. The reality is that 99% of all investors seeking profits in the area don't understand that there are differing investment views when it comes to local money and international money.

For instance, in Asia, managers tend to focus almost exclusively on top-line [revenue] growth, whereas Western managers and investors all tend to focus on bottom-line profitability. Obviously, those two objectives don't always align. And that creates a potential mismatch that can wipe out unsuspecting investors who are out seeking a "quick buck" profit.

Profit Plays for a Potential Slowdown

Bigger-company shares - like those we prefer - will keep their edge longer, even if there is a China-induced slowdown during 2008. We think such a slowdown is unlikely. But given the high-valuations that remain after last year's big run-up, it's a possibility, nonetheless.

With regard to favorite choices that meet our regional criteria, some at the moment include Zurich-based ABB Ltd. (ABB), which provides electrical power infrastructure in the region. China Medical Technologies Inc. (CMED) and Huaneng Power International, Inc. (HNP) fit the "Global Titans" model, too, but in reverse. Both firms focus on China, but also have important international operations with great potential outside of Mainland China.

If a broader holding is more your speed, without a doubt the best in class in our opinion is the China Region Opportunity Fund (USCOX), a mutual fund run by San Antonio-based U.S. Global Investors Inc. (GROW). And U.S. Global, itself, is not a bad play on international growth. It manages some of the best emerging-market funds, and natural-resources funds, in the business. As global growth fuels global investments - and it will - U.S. global will see more money pour into its funds, boosting the management fees it collects, as well as its profits and stock price.

The bottom line on Asia in 2008 is that we expect global volatility to sweep through the region, even though it is awash with liquidity. We see China leading the pack for decades to come, just as Japan did a half century ago. Yet, in the longer-term, we don't see a direct correlation between regional economic growth and equity valuations. And that suggests that a safety-first approach - with a focus on large-cap companies that are globally diversified - is the strategy to follow if you want to maximize your profits from Asia.

Money Morning's "Outlook 2008" series last covered Agricultural Commodities.  Next up: Biotechnology.

About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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