What Americans need to know to benefit from an EMERGING ASIA
Investment Warning About Japan
June 2008
As the United States struggles through a tough economic time, it's important to distinguish the difference between the economies of Japan and China. Right now, Japan is very much like the United States. Both economies are huge, established machines. The US is the largest economy in the world followed by Japan. As a result, the economic stagnation felt by the US over the mortgage crisis will likely impact Japan hardest among Asian economies. On Monday, the former Bank of Japan Deputy Governor Kazumasa Iwata said "the economy is at a difficult stage. Japan's industrial production and capital spending are flat and growth in corporate profits is slowing, though at high levels." He also pointed out that prices of oil and food prices continue to rise.
Meanwhile, China marches on with impressive growth. Even if it falls off a bit from last year's 11.9% GDP expansion, it will still be relatively good. China's GDP for 2008 is expected to be a robust 9.8%. Japan doesn't have that kind of cushion. Any slowdown of Japan's economy will bring expansion of recent years to a standstill.
The bottom line here for investors is to treat investments in Japan like you would investments in America. Be cautious. China is still very much an emerging market and strong growth is expected to continue.
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The head of JP Morgan Chase in China now says China's listed companies are like to grow 20 percent this year. Li Jing made that statement during a news conference last Friday. That would be a remarkable achievement considering the weak first quarter of the year and the devistating earthquake in Sichuan last Monday. It is becoming more and more evident that America's economic woes are not Asia's problems. Sure, the US stock market takes a hit and so do the Asian markets. However, that doesn't mean Asia's growth stops because America slows down. China's exports may be impacted when Americans buy less, but China's domestic demand is so HUGE that their economy will continue to expand regardless. This is even more true for India since they export very little to the US and also have a huge population.
A few years ago it was believed that emerging markets were dependent on the US economy. In recent decades, however, these markets have matured and their leaders got smarter. They increased their cash reserves, strengthened their currencies and developed their domestic markets. Now their economies are healthy and fueled by a seemingly endless supply of hungry consumers.
Alan Levenson, T. Rowe Price chief economist says, "look at China, and India is the same story: Millions of people are moving from subsistence farming to urban manufacturing, resulting in a massive boost to output. It's like a new country joining the world economy every year."
If you are looking for a broad investing approach, look for a diversified mutual fund focusing on China. See the Top Performing Mutual Funds Investing in Asia section. If you want a specific stock, look for something that develops infrastructure. A recent Morgan Stanley report expects infrastructure spending to top $21 trillion over the next decade. China and India will account for nearly half that. Consider China's Shanghai Industrial Holdings Limited which makes roads, water facilities and commercial projects. Also, India's GMR Infrastructure which develops roads, airports and energy facilities. Keep reading to find out how to buy stocks from Asia.
WHY INVEST IN ASIA? A weaker dollar raises the price we pay for imported goods. American companies often use that as an excuse to raise their prices since foreign goods cost more. That means everything you buy is more expensive and your dollars are worth less. It is then to your advantage to have a chunk of your money in a better performing currency. Asian markets have racked up strong gains over the past few years. The returns were made even stronger as the dollar fell. Companies in the Standard & Poor's 500-stock index are catching on. America's largest companies make about 45 percent of their money overseas. As they are paid in foreign currencies they make extra money as they convert it back to weakened dollars.
The US dollar is at record lows against many foreign currencies and all indications are that the trend will continue. Economists at Standard & Poor's project the dollar will to fall through 2009 and then stay flat through 2011.
If the big companies can do that, so can you! Here's some advice from Paul Barrett, head of foreign-exchange trading at J.P. Morgan Chase. He says investors with a moderate tolerance for risk should have at least 15 percent to 20 percent of their holdings in non-dollar-denominated assets.
There is an easy way to do this, profit from a limp dollar and keep your investments relatively safe. It is to own foreign stock and bond mutual funds that don't hedge against currency movements.
Here's some advice from Bill Rocco, senior analyst at Morningstar Inc. He says most investors should own one or two international stock funds: one that holds large-cap stocks in big markets and one invested either in smaller-cap stocks or emerging markets.
How to BUY STOCK from ASIA
It's not as difficult as you may think! Essentially there are three ways.
EASIEST: Buy a mutual fund that invests in Asia. It's as simple as opening an account and sending a check. Take a look at all the charts to the right. They show the best performing mutual funds for diversified Pacific/Asia, Pacific/Asia excluding Japan, and Japan. Japan is often removed from Pacific/Asia funds because it is already a fully developed economy and there isn't as much room for growth. Be sure to read all information about a fund before investing! Some of these mutual funds come with fees or "loads" that will eat up your profits. I prefer "no load" funds from companies like Vanguard, T. Rowe Price, and Fidelity. Always check the fees on these accounts. They can eat up your profits too.
ADVANTAGE: EASY TO DO
DISADVANTAGE: NOT AS AGRESSIVE AS OTHER INVESTMENTS. Then again, that is an advantage to many who aren't as daring with their money.
EASIER: Buy Asian stocks through
American depositary receipts (ADRs) or exchange-traded funds (ETFs). These trade like US stocks but are made up of stocks from Asia. Essentially a financial institution buys the stock in Asia and sells you a share of it. They take a fee for this but everything is done in dollars and you wont have to deal with currency converstion. Of course, that can be a negative if the dollar keeps falling. You want your money in a stronger currency if the dollar is weak.
ADVANTAGE: EASY WAY TO GET INVEST IN INDIVIDUAL STOCKS FROM ASIA.
DISADVANTAGE: STILL PRICED IN DOLLARS SO YOU'RE NOT FULLY TAKING ADVANTAGE OF STRONG ASIAN CURRENCIES AGAINST THE DOLLAR.
EASY: Buy securities directly on foreign exchanges. It's more complicated than buying domestic stocks but not impossible. There are brokerage companies on-line that can hook you up. Most notable are E*Trade and Interactive Brokers. You can also deal with a full service broker but expect high fees. Always check those fees and read all info before investing!
ADVANTAGE: YOU ARE INVESTING DIRECTLY IN THE MOST EXPLOSIVE MARKETS IN THE WORLD.
DISADVANTAGE: MORE RISKY AND HIGHER FEES.
DIVERSIFIED PACIFIC/ASIA FUNDS
In the short term, nothing is beating Matthews Asia Pacific Equity Income. It grew an impressive 10.57% over the past 3 months. It is also about the only Asia Pacific fund around without a YTD loss.
As for long term, Allianz has four Pacific Rim funds that grew more than 23% over the past 3 years.
Asian stocks, like most stocks worldwide, are down for the year. However, they are shooting back up as you can see from the short term gain. They are also way ahead if you look at the long term. The YTD (year to date) losses aren't dampening the long term gains much at all.
Why exclude Japan? Many investors like to exclude Japan from investments in Asia because Japan is different from the other Asian economies. It is already fully developed, so doesn't behave the same as countries like China. China is growing in all sorts of ways that Japan is not. It would be like lumping the American economy together with Mexico. They are drastically different.
The top short term performer in this category is Guinness Atkinson Asia Pacific Dividend. It has grown 11.89% over the past 3 months. Fidelity China region is also notable. It's up 10.45%
If you're looking at long term, Dreyfus and Nationwide each have several mutual funds focusing on China that have blossomed more than 35% over the past 3 years.
Keep in mind that just about every mutual fund in this category is down YTD (year to date). These latest numbers are gains depite the recent drop. Impressive, don't you think?
A number of DWS Japan Equity funds are doing quite well in the short term. They have gained as much as 16.18% in the past 3 months.
Leading the way in long term Japan funds is the Vanguard Pacific Fund Index with a 3 year gain of 13.27%. Also check out Fidelity Japan with 9.83% growth over 3 years.
Keep in mind that all Japan funds took a beating over the past year. These latest returns are a strong indication that they are bouncing back from the bottom.
STOCK MARKETS IN ASIA
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