Are Asian Stocks Going Up? Plus, ADRs, Dragons and Where to Find the Biggest Profits

By Dr. Steve Sjuggerud, President, Investment U
Friday, October 10, 2003: Issue #280

“… If the U.S. goes sideways, Asia goes up. If the U.S. goes down, Asia goes down less; and if, in the best of all worlds for us, the U.S. goes up, Asia goes up more.” – Hedge fund manager James Ayer

James Ayer argues that Asian stocks are relatively cheap compared to U.S. stocks, in the latest issue of Grant’s Interest Rate Observer (www.grantspub.com). He opines that, unlike the U.S., which is riding a wave of optimism, Asia is still demoralized.

Let’s take a look at the major stocks in Asia, to see if he’s right Then we’ll zero in on a handful of Asian stocks and funds that are bounding forward like so many Chinese dragons at a New Year’s festival – including one that’s returned 40%-plus profits in the last six months alone…

Japan and Friends First…

Let’s take a quick look at the major players in the developed countries first: In Australia, the big ADRs (ADRs, American Depository Receipts, are foreign stocks that trade in the U.S.) are News Corp. (NWS) (owners of the Fox TV network) and mining-giant BHP Billiton (BHP). Both of these are expensive (based on forward P/E ratios).

Japan is a bit cheaper, with the huge mobile phone operator DoCoMo (DCM) trading at a forward P/E ratio of 24, and Toyota Motor (TM) at a forward P/E of 13. Nothing to get excited about, in my book. Telecom New Zealand (NZT), the major ADR from New Zealand, is relatively cheap, at 11 times forward earnings, but I’m not a buyer.

Asian Stocks or “ASEAN” May Be The Best Values

The stocks of the ASEAN (the Association of South East Asian Nations) offer good value. The major countries of the ASEAN are Indonesia, Thailand, Singapore, Malaysia and the Philippines (there are others). Since very few Singapore stocks are listed as ADRs, the major ADRs out of the ASEAN region include Telekom Indonesia (TLK), at a forward P/E of 7.5, and Philippine Long Distance (PHI), at a forward P/E of 8.6. These prices are cheap, but these are volatile countries, and are priced with that assumption built in.

Value In Emerging High-Tech Stocks?

Some Asian countries are particularly known for their high-tech operations. Let’s take a look at a few of the first-world companies in Asia Taiwan Semiconductor (TSM) is at a forward P/E of 23. India’s drug giant Dr. Reddy’s Labs (RDY) is at a forward P/E of 16. And Korea’s SK Telecom (SKT) is at a forward P/E of 8.5. I like Korea, but I can’t get excited about India or Taiwan.

China’s two ADR giants, Petrochina (PTR) and China Mobile (CHL), are not that expensive at forward P/Es of 12 and at two times book, even after their fabulous share price rises recently.

To me, Korea looks the most attractive. Indonesia and the Philippines might appear cheap, but those countries are always risky. The other countries aren’t enormous bargains unless you’re someone like hedge fund manager James Ayer, who can afford to seek out small, undiscovered stocks in these countries.

The folks at Templeton Funds have a long history of finding stocks like these. Their Templeton Dragon Fund (TDF) might appeal to you if you’re interested in getting exposure to slightly lesser-known China/Taiwan/Hong Kong plays. The Scudder New Asia Fund (SAF) offers aggressive exposure to nearly all of Asia, and it trades at a discount to its underlying value. If Ayers is right, that fund should do very well.

The safest route might be what I recommended months ago to readers of my newsletter: the Emerging Markets ETF (symbol EEM). It’s basically an emerging markets index fund that’s up over 40% since inception six months ago.

To learn more about the Templeton Dragon Fund, the Scudder New Asia Fund, and EEM, visit the highly informative website for funds that trade on exchanges: www.etfconnect.com

Good investing,

Steve

Today’s Investment U Cribsheet

• Asian stocks may be a relative bargain when compared with the U.S. But I don’t see them as an absolute bargain. I do think that James Ayer is probably right: Asian stocks will do better than U.S. stocks in the near future.
• If you’re really interested in getting to know what’s going on in Asian business, the Far Eastern Economic Review is a very good publication. Its website is good as well (www.feer.com), and there is a free trial available. If you do try it, don’t miss the “Travelers Tales” section – it’s always good for a laugh.

Comments

By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.

Check out our selection of daily investment research: