Thursday, July 26, 2007

The 21st Century Belongs to Asia and Investors in This Dynamic Region


This century belongs to Asia. If the United States dominated the last century and Britain spearheaded the 19th century's economic progress, then China and many of her regional trading partners will set the standard for wealth accumulation in the 21st century. Over the next 100 years, the entire Asian bloc will host the greatest economic boom the world has ever known.
So what inspires me to make such a bold prediction? No other economic region has amassed more foreign-exchange reserves, sports the largest combined trade surpluses with the rest of the world or holds title to the most undervalued currencies.
At some point, Asia will create a common Pan-Pacific currency unit, rivaling the mighty euro and possibly challenging the latter as the leading contender to become the world's de facto reserve currency later this century as the U.S. dollar continues to decline.
Although the majority of Asia markets have already hit all-time highs, several countries, currencies and local real estate markets remain excellent values, which can all complement your long-term growth portfolio.
Notice: China Dominates the Emerging Markets in Current Account Balances, Capital Flows and Reserves
Back in the late 1990s, most of the Asian bloc countries were trapped in an economic depression that nearly destroyed regional capital markets. Now just 10 years later, Asia has completely resurrected its balance sheets.
Meanwhile, as Asian emerging markets continue to boom this decade, the industrialized economies of Western Europe and the United States continue to accumulate record deficits ahead of huge entitlement spending burdens as their populations continue to age.
China is the New Japan in the 21st Century
Prior to the bull market boom of the 1980s and 1990s in Asia, Japan was one of the fastest-growing economies in the region.
Like China today, Japan in the 1960s grew very rapidly and consumed swaths of raw materials as her mighty economy grew rapidly.
Unfortunately for Japan, this rapid growth accelerated industrialization and created a massive bubble in her capital markets in the late 1980s. Suddenly, Japan became the first Asian domino to fall starting in 1990. Seven years later, Thailand unleashed another wave of financial panic, spreading across the region and resulting in the Asian Financial Crisis of 1997-1998.
Asia, including Japan, has learned a great lesson from the economic crisis a decade ago.
Compared to 1997, the region currently holds almost US$2 trillion in foreign-exchange reserves, bulging trade surpluses with the rest of the world and extremely undervalued currencies, especially versus the euro. And, unlike 10 years ago, many regional markets have introduced bold new measures to curb speculation and leverage.
It's true that there's still plenty of risk in investing in these markets. But if you're a value investor, in Asia you will find several countries paying big dividends in cheap currencies supported by healthy balance sheets - extremely compelling factors to remain a long-term investor in any country.
Here Come the Pension Funds!
Supply and demand dictates price trends for every asset class. And across Asia, more state-sponsored pension funds are directing capital to stocks as they seek to boost U.S. dollar-based, inflation-adjusted returns.
A few hundred billion dollars will find its way to regional and global equity markets over the next decade. That alone will reduce the net supply of stock. Provided global inflation remains historically low and interest rates are stable, pension funds will increasingly apportion more capital to equities.
For example, in Japan, the government's state-controlled pension fund recently announced it will invest US$900 million in Japanese smaller companies.
Other countries, including China and South Korea, have announced equity investments to augment their fat reserves, mostly invested in Treasury bonds.
My Favorite Contrarian Plays to Tap into the Asian Real Estate Draw
Each of these securities is coined a "contrarian" investment. That means they trade at or near their lows and sport big dividends in local currencies. In some cases, these contrarian plays have declined more than 40% from their highs.
In particular, I'm looking at Singapore REITs (real estate investment trusts), Hong Kong REITs, Thai blue-chips and distressed Japanese smaller companies, all of which are all incredibly undervalued.
Compared to most major cities in the world, select Asian real estate markets like Singapore and Bangkok remain extremely undervalued. In Hong Kong, where foreign investors receive tax-free REIT dividend income, the local real estate funds have declined over the last 12 months amid the speculative stock-market frenzy in nearby Shanghai, detracting fund-flows.
But overall, Asian REITs continue to rise in value this year, while real estate investment trusts in the United States, Canada and Western Europe are suffering steep losses following years of outsized gains.

No comments: