How to Profit From the Ongoing Shift in Global Power

by Tony Daltorio, Investment U Research
Friday, February 19, 2010

In the financial world, any kind of random deviation from the norm – especially a drastic or detrimental change – can be called a “black swan.”

That term got significant face time in last year’s headlines, as everybody worried about the stock market taking a double dip downward. Now in 2010, recent market volatility has some commentators speculating about it still.

The black swan they’re concerned about – the kind where the western world tumbles again on devastating news – could happen. But then again, it might not.

And the talking heads appear too preoccupied with what might happen to notice a much more likely scenario. The next black swan event could simply involve China reclaiming the status it held for 18 out of the last 20 centuries: The world’s largest economy.

China’s Due For an Economic and Market Correction

Admittedly, China is probably due for an economic and market correction, but don’t expect that pullback to last for long. The country has shown a strong, positive economic trend for the past 40 years, growing an average 9.3% annually and 371% altogether.

Skeptics point out how China depends too heavily on exports to grow on its own merit, but that hasn’t been true for years now. These days, net exports account for only about 20% of China’s GDP, which means that it depends on itself for the large majority of its growth.

If anything, China imports more than any other country in the world – other than the U.S., of course – and spent $797 billion on other country’s goods between January and October 2009. BNP Paribas adds that the country imports nearly 90 cents for every $1 it exports.

It appears to be a growing trend too, considering how South Korean exports to China rose 94% in December year-on-year, Taiwan’s exports climbed 91.2% and Malaysia’s jumped 52.9%.

Those numbers, while impressive all by themselves, tell a much larger story than they show at first glance… They show how China may not need to rely on trading with the U.S. for too much longer as Asia learns to sustain itself, by itself.

China Takes Advantage of its Neighbors Success

Statistics show a stark increase in Asian, African and Brazilian influence on Chinese trade.

From January through October 2009, China only did 13.6% of its total trading with the U.S. Meanwhile, Africa and the 10 nations of the Association of South-East Nations (ASEAN) accounted for a combined 13.5%, Brazil and India made up another 4%, and Australia and Russia contributed 2.7% and 1.8% respectively.

Then, in November, exports to ASEAN rose 20.8% year-on-year, even while they fell 1.7% in the U.S… Incidentally, ASEAN imports surged 45% during that time.

China’s trade with the region rose nearly 20-fold since 1993. And last year, it bumped the U.S. from its long-standing position as ASEAN’s third largest trading partner… not to mention how it began a free trade agreement with ASEAN that officially began on January 1, 2010.

Officials in Beijing want to boost those ties further in a number of ways, including by promoting adoption of the yuan as a hard currency in several neighboring economies.

That would, of course, lower dependence on the U.S. dollar in that region of the globe, an idea that suits them just fine considering the west’s continuing problems and Asia’s promising, industrial production recovery.

Frederic Neumann, an economist with HSBC, elaborated on that subject when he recently said: “Going into this crisis, we never thought that if China recovered, it would suck in imports from other Asian countries on a scale that could play a serious role in generating regional economic recovery, but that seems to be what is happening.”

Four Ways to Profit From China’s Trade

With China relying less and less on the U.S. and more and more on its fellow developing nations, investors need to smarten up and take advantage of the new trading climate emerging. To do that, they need look no further than countries like Indonesia, Philippines, Singapore, Thailand, Vietnam and the other members of ASEAN.

Fortunately, with exchange traded funds (ETFs) around these days, investors have several reputable choices when browsing through Asian markets. Some of those include:

• Market Vectors Indonesia Index ETF (NYSE: IDX)
• iShares MSCI Singapore Index Fund (NYSE: EWS)
• iShares MSCI Malaysia Index Fund (NYSE: EWM)
• Market Vectors Vietnam Index ETF (NYSE: VNM)

All four offer a solid, profitable way to play the rapidly growing trade relations between China and ASEAN… and the economic shift away from the U.S.

Good investing,

Tony Daltorio

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