Four Rules for Asian Investors

Less than a month ago, everyone was talking about the Chinese stock market’s 9.2% single-day loss, and the global sell-off it triggered. At the time, I urged you to hold steady and treat the drop as a buying opportunity. I said,

“I believe this is an unwarranted knee-jerk reaction. But it’s also a good thing for longer-term investors. There are dozens of Asian blue chip stocks that have now come back down to levels that look pretty darn appealing to me.”

That proved to be good advice. Reason: The Shanghai Composite Index hit a new, all-time high last week. Yup, in just four weeks, the Chinese stock market recovered everything it had previously lost â€¦ and then some!

Clearly, investors who kept their heads during the sell-off have been rewarded with big profits. But while the Chinese market has been on a roll, you can’t throw money into it haphazardly.

Hey, I believe China is only in the third inning of a very long baseball game, but you need to stay on top of these markets because things are constantly changing.

It reminds me of an ancient samurai maxim â€¦

“After Victory, Tighten
Your Helmet Cord.”

This is what Ishida Mitsunari, a samurai leader, told his victorious army after the battle of Sekigahara, a landmark event that brought an end to centuries of civil war.

The saying’s meaning is simple: Just because you won today, it doesn’t prevent a new challenge from arising tomorrow. And I’d argue that the same principle applies to investing in Asia today.

Even Chinese officials acknowledge as much. Before that 9.2% drop in China’s stocks, Cheng Siwei, the Vice Chairman of the National People’s Congress said,

“Investors should be concerned about the risks. Every investor thinks they can win. But many will end up losing. But that is their risk and their choice.”

The People’s Bank of China also took two substantial steps to suck some of the liquidity from its economy. It lifted bank reserve ratios by 0.5% to 10% and raised its overnight lending rate by 0.27%.

It is probably a symptom of my 1970s economics education, but I believe money supply ultimately controls asset prices. It is no coincidence that China’s money supply and economy have grown by 70% and 40%, respectively. If the Bank of China keeps hiking rates, that could quell some activity.

And last week, another new challenge came to the fore. I’m talking about the U.S. Commerce Department’s decision to reverse a decades-long policy of free trade with China by imposing tariffs on glossy, “coated-free” Chinese paper.

This astounding about-face shows Washington’s growing resentment of the ballooning trade deficit with China, which hit a record $233 billion in 2006.

Worse yet, it may be just the first of more protectionist moves if Congress, under pressure from U.S. manufacturers, gets its way. U.S. manufacturers were the hardest hit by a record $763.6 billion trade deficit and continue to lose market business to foreign competition.

This is certainly something to watch. However, I don’t think the Asian stock market party is over in the least. In fact, I have not lost one drop of my long-term enthusiasm for China and its rapidly growing Asian neighbors. That’s because the long-term economic signals are as positive as they have ever been.

Just last week, the Asian Development Bank (ADB) raised its growth forecast for Asia from 7.1% to 7.6% in 2007. It also predicted growth of 7.7% in 2008, and said the outlook for Asia will “remain broadly favorable.”

The ADB expects the biggest contributors to be China and India, which are expected to expand 10% and 8%, respectively. However, it also sees healthy gains from Cambodia, Malaysia, and Singapore.

So, against a backdrop of great fundamentals, and a few potential speed bumps, here are â€¦

My Four Rules for
Investing in Asia

1. Buy-hold-and-pray won’t work. For the last four years, even dart-throwing monkeys made money investing in China. Going forward, I think investors will need to be more nimble. Don’t hesitate to take profits after large moves, and use defensive strategies like protective stop losses to manage risk.

Just last week, for example, I instructed my Asia Stock Alert subscribers to move up their stop losses on Siliconware Precision Industries and MEMC Electronic Materials. I think those two companies have extremely bright futures, but we’ve doubled our money in only nine months! It only makes sense to protect our profits.

2. Don’t ignore more focused investments like ADRs. Exchange-traded funds have exploded in popularity, and they’re an excellent way to get a diversified stake in specific countries or regions. However, don’t shy away from great individual companies, either. Some wonderful firms make it especially easy for U.S. investors by listing American Depositary Receipts (ADRs) on our exchanges.

3. Pick the right sectors and industries. In my opinion, one of the keys to profiting from the Asian growth miracle is concentrating on the right areas. For a full description of my top three investment areas, read “My Favorite Ways to Invest in Asia.”

4. Don’t get stuck in just one country. While China’s stocks have bounced like a super ball, many other Asian markets are still on sale. And as I mentioned earlier, a lot of them have spectacular growth prospects.

In fact, I’ve already booked my next trip to Asia to visit some of these countries in person. Every trip I’ve made to Asia has led to great gains down the road, and I think this one will be just as rewarding. Stay tuned!

Best wishes,

Tony

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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.

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