Your Passport to the Asian Markets in 2011
by Carl Delfeld, Contributing Editor, Investment U
Wednesday, December 22, 2010: Issue #1413
Grab your passport… we’re heading east for the holidays.
With the United States and Europe still battling through high debt and low growth struggles (among other things), overseas markets again offer an excellent chance to diversify your portfolio and enhance your profit potential. After all, a narrow portfolio is likely to produce slim gains.
And once again, it’s no surprise to see Asia take center stage when it comes to foreign markets.
But against the backdrop of higher inflation and rising interest rates across much of the region, how will Asia-Pacific markets fare in 2011?
Let’s go on a quick Asian tour to find out…
Embrace Your Contrarian Side Up North
With its stock market trading at about 25% of the peak it reached in 1990, Japan is a perennial disappointment to investors trying to take advantage of a resurgence.
Japan is one of the most distinctly contrarian plays in Asia these days, but the key to a strong Japanese market next year is two-fold…
- A weaker yen.
- A keener interest from the Japanese to invest in their own market.
And there’s at least one positive sign here. The recent 5% cut in Japan’s corporate tax rate sends a signal that economic growth is a key priority for the government. The hope is that it will be enough to ignite a rally.
In addition, Japan’s low relative valuations could be a catalyst – and even if Japanese investors are still reluctant to invest, low prices could prove attractive for foreign investors in search of bargains. Interestingly here, Japan’s small-cap index – represented by the iShares MSCI Japan Small-Cap Index (NYSE: SCJ) – is collectively trading at less than its book value.
Moving south…
China’s Inflation Battle Heats Up… And Hong Kong Could Benefit
All eyes will continue to remain focused on China’s relentlessly red-hot growth story. But increasingly, that focus is turning to whether China can keep a lid on inflation and a sharp spike in food prices, while also trying to maintain high economic growth.
Right now, the battle is truly underway and China is struggling to rein in its overheated real estate market. This is a key concern, with property prices in urban areas like Shanghai and Beijing off the charts, relative to disposable income. In fact, they’re 12 to 14 times higher than the historical high of eight times higher at the peak of Japan’s property market in 1989.
This is a clear flashing yellow light, so proceed with care here. However, the upside is that if money flows out of the property markets and into the stock market instead, it could lead to a major rally, given that Chinese investors are pure momentum players.
The best bet here may be to direct your money towards Hong Kong’s Hang Seng index, as represented by the iShares MSCI Hong Kong Index (NYSE: EWH). That’s because it has the capacity to absorb the money flows headed to the region and many Chinese companies prefer this exchange to launch their get-gloriously-rich IPOs.
On a related note, China’s ambivalence to step into the increasingly serious Korean tensions has triggered uncertainty for South Korea.
However, if adequate measures are taken to contain the rogue North and this dark cloud is lifted, South Korea’s Kospi index could fare very well. The index already trades at a tempting 35% discount to the iShares MSCI Emerging Markets Index (NYSE: EEM). Remember, the Kospi includes major South Korean firms like Samsung, LG and Hyundai Motors – all of which are part of the iShares MSCI South Korea Index (NYSE: EWY).
Indy: Not Just a Great Racetrack… A Great Country, Too
Next up is a regional grouping of personal interest to me – the Association of Southeast Asian Nations (ASEAN). Combined, the 10 members represent 600 million people and a GDP of over $1.7 trillion.
And currently leading the pack is the most overlooked market in the world – Indonesia.
The resource-rich nation boasts the world’s fourth-largest population and its stock market is up a sizzling 48% this year. I recently added Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia (NYSE: TLK) to my Chartwell GNP 30 portfolio, based on its monopoly position in the sector, strong cash flow, low valuation and hefty 6.5% dividend.
On the downside, Indonesia does have plenty of catching up to do, given its $1,500 GDP per capita income. But if investors can get beyond the market’s high valuations, it could easily do well again in 2011.
Score an ASEAN Triple in 2011
Elsewhere in the ASEAN bloc, I’ve profiled Singapore and Malaysia recently. They both remain high-quality picks going into 2011 and are right at the center of the Asian growth story.
I often refer to this pair as “Malaysiapore” since they complement each other so well. But here are the main catalysts for them next year…
~ Malaysia: The country will benefit if commodity prices stay firm. However, you might be surprised to learn that 50% of its GDP comes from its service sector.
~ Singapore: The “Switzerland of Asia” will continue to fire on all cylinders if Asia-Pacific trade remains robust.
But if you’re looking to fly a little lower under the radar, consider…
~ Thailand: The country enjoyed an amazing year, despite the political chaos and riots back in April. From late 2009 to the end of November, the Stock Exchange of Thailand (SET) returned 42.9% in local currency terms and 57.96% in U.S. dollar terms.
This shows that bullish emerging market investors can shrug off as “normal” what would send most investors to the sidelines. I look for Thailand to do well again in 2011, as it’s still reasonably priced at 12 times 2010 earnings. You can play it easily through the iShares MSCI Thailand Index (NYSE: THD).
However, the health of the aging and venerable King Bhumibol Adulyadej – a source of stability to the country since his reign began in 1946 – is concerning.
So what of Asia’s other big player – India?
Go Small in a Big Country
After a ferocious mid-year rally, India is suffering some turmoil as the Sensex index limps to a weak finish.
The problem is a widening corruption scandal involving some telecom tycoons and the powers that hand out juicy contracts. This has touched a raw nerve in a country where 67 billionaires account for 20% of the country’s wealth.
In addition, high valuations and inflation are weighing on India at the moment. The central bank has raised interest rates six times this year in an effort to stem high inflation, while valuations for the Sensex remain at high and vulnerable levels (double that of Thailand), so I remain cautious.
There is one play, however. I’ve noticed that Indian small-cap stocks have shown some vitality lately, even as the top-heavy index has declined. This trend could continue into 2011 – and you’ll want to be positioned in the EGShares India Small Cap ETF (NYSE: SCIN).
And finally, the sweet spot for Asia growth…
Toss Another Gainer on the Barbie
As I mentioned in more detail recently, Australia is a great proxy for Asia’s overall growth, as it’s a major supplier of commodities and energy.
It’s not surprising that 72% of Aussie exports go to Asia. Nor is it surprising that China is the hungriest market. Concerns over a proposed “super tax” on resource companies seem to have abated and the Australian central bank has done a great job in negotiating its economy through the global downturn, with well-judged loosening and tightening of monetary policy.
With the Aussie dollar now roughly at parity with its U.S. counterpart and the country’s top four banks (banking represents 40% of the Aussie market) in good shape, consider the iShares MSCI Australia Index (NYSE: EWA) here.
Bottom line: If you’re looking to diversify your portfolio abroad in 2011, Asia offers plenty of options to do so easily and efficiently. And I’ll keep you updated on these markets as we move forward next year.
Good investing,
Carl Delfeld
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