Time to Hop Back Onboard the Asia Express?

Word on the street is to stay way from the Asian markets and for good reason – high energy prices, high commodity prices and high inflation have caused a level of turmoil in the Asian financial markets over the past year. Most Asian stock exchanges are down by over 30% since the beginning of the year.

For the prudent investor, this may be the best time to get your feet wet, particularly when others are shying away from these markets. Asia is still the growth of the future, with countries like China and India continuing to project significant year-on-year GDP growth.

The collapse of the financial markets is not a surprise because:

1. Financial markets are often not tied directly to the real economy.

2. Significant run-up over the past several years has created a bubble, which is now simply correcting itself.

The growth story in Asia continues to be strengthened by its strong agricultural and manufacturing-based economies. In addition, stronger currencies (particularly the Chinese Yuan and the Indian Rupee) are indicative of strength.

To further understand why we ought to get into these markets, let us take a look at the investment cycle, using the Shanghai Index [SSEC] as an example.

A cycle typically begins with value investors picking up stocks at relatively low multiples – for the SSEC this was around end of 2005 and beginning 2006. Stocks were cheap and robust regional fundamentals indicated a strong buy.

As the buying builds up, the stock price forms a breakout and by doing so grabs the attention of other investors creating increased trading volume. This is attractive to momentum players and can last a couple of legs. For the SSEC, this occurred between middle of 2006 and middle of 2007.

As the hype continues to build, retail investors begin pouring into the markets (middle to end of 2007). This typically occurs near the last leg up, and is often the time when value players and momentum players sell their positions. Unfortunately, for most retail investors, they get trapped at this leg and are 'slaughtered' by the ensuing sell-off.

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The current situation indicates good timing for investors to enter the markets. For those of you trying to 'time' the bottom, I wish you luck because few people on earth can do it consistently. Whether the market goes up or down in the next several months is anybody’s guess but it certainly seems like a base will form soon and strength in the economy indicates an excellent long-term story.

Comments

[fxtrader07:]

i basically agree - though particularly India looks still vulnerable to another leg down.
A point of dissent though: stronger currencies do not imply strong fundamentals. It can be quite the opposite more often than you might think.

2008 Jul 07 07:46 AM

[businessguy88:]

May be pre-mature for now, but looking to join in soon.

2008 Jul 07 08:52 AM

[Ketan Desai:]

“In addition, stronger currencies (particularly the Chinese Yuan and the Indian Rupee) are indicative of strength.”

Not true – while the Chinese Yuan/Renminbi has shown strength against the dollar (finance.yahoo.com/curr...), the Indian Rupee has not (finance.yahoo.com/curr...)

2008 Jul 07 08:57 AM

[James Lewis:]

As the market stands there are a lof of fundamental bargains that value investors would feel comfortable buying. There are also a lot of overvalued stocks with fake accounting skeletons in their closet. Its a stock pickers market. Margins are being squeezed by in inflation in a lot of market sectors but there are also a number of companies that will benefit from RMB revalution.

I also believe that prices will go up in China in every sector, this will increase margins. If demand does not wane as prices move up. I think that a lot of chinese companies will have a good year. Especially with the olympics around the corner.

The Olympic may have started today...
Lets see if we can get higher than 3000 in the next few weeks.

2008 Jul 07 09:58 AM

[Edward Janeck:]

China is one of the best investments in the world, right now. With the pullback it is time to invest. When things clear up around the world China will be in position to excel.

2008 Jul 07 12:58 PM

[Urbane Gori...:]

I'm half the way through James Trippon's book.. "Become Your Own China Guru"... It's a great read and everything he states seems sensible ... Very much on the same page as Jim Rogers... I bought it off Amazon (Used... Sorry Mr. Trippon..) and suggest it to anyone who is interested in China as an investment.

Thx jegan ;-)

2008 Jul 07 01:36 PM

[jtmuhn:]

interesting text-book rehash of technical investing. i have two comments. first, my guess is that if nothing disastrous happens during the olympics, the market will up. nerves are high now. second, i wish you added that there could be no value investing in China at this juncture. Chinese play the market like mahjong, so investor sentiment is not really investing sentiment here. as a matter of fact it is something like the opposite of investor sentiment. unlike many foreigners, Chinese know that without a judiciary or sec and with every Chinese company keeping two sets of books, the basis for value investing is absent. in markets here there is no transparency, and until the company p/e's reflect that risk (which they don't), every investment here is speculation. funny how no one on wallstreet blinked when sohu.com cooked their books this past quarter so their boss and others could dump stock. please don't use wording like "fundamental bargain" in the same sentence as "China". that said, insurance and one banking stock have almost hit my targets for a purchase - it is an event driven, yet technical purchase.

2008 Jul 07 07:03 PM

[X-15:]

jim rogers likes china-warren buffet says nice things about china---I like JST , WH, WATG, CIADF -good stocks, and currency.

2008 Jul 08 01:08 AM