Emerging Markets - A Pause to Refresh?

By: Yiannis_G_Mostrous

The markets continue their quest for stabilization, and it seems that, for now, it's been achieved.

Although no one really knows what will be the end game in regard to the credit issues surrounding the financial system, the fact remains that investors have been given time to reassess the situation and evaluate their investment positions.

In The Silk Road Investor , we took profits-–without selling out of initial positions--in early August and have been selectively adding to some of our long-term favorites.

Currently, institutional players believe it will take some time for five years of leverage to unwind, or at least for it to become clear where the leverage was used wisely and unwisely. I agree. But that doesn't mean you can't find the upside to down markets, especially if you're hedged properly.

Short term, I expect more volatility for the next couple of months and possibly another leg down before the markets rally to close the year. Of course, a US recession or a big distraction to the financial system--a total collapse, as the pessimists predict--will make every projection look silly.

That said, one market I continue to be bullish on is Korea. The economy has more defensive qualities than is commonly believed and will be one of the least-affected economies in Asia if the credit crunch goes catastrophic.

Korea has learned its lessons from the financial crisis 10 years ago. Most important, it's diversified its export base, becoming much more than a tech-oriented economy. Cars, ships, industrial machinery, chemicals, metals and petroleum products have become increasingly important pillars of the economy.

Korea has also been raising rates, which will allow monetary authorities the opportunity to cut if the need arises. Inflation is well within the central bank's target range. I'm sticking to my long-held view that the Korean economy will perform well going into 2008.

Hong Kong has also been a favorite here, and it remains so. Even though it could slow during substantial US economic weakness, the market is fairly undervalued compared to the past. And property prices--an important aspect of local economic activity--haven't been as strong as some have believed.

Property, in particular, will make a bigger comeback, especially if the US Federal Reserve cuts rates and the US dollar--to which the Hong Kong dollar is pegged--weakens. Hong Kong banks are in great shape and can facilitate retail loans once demand picks up.

I continue to favor financials and telecoms in Korea and property developers and banks in Hong Kong.

By Yiannis G. Mostrous
Editor: Silk Road Investor, Growth Engines
http://www.growthengines.com

Yiannis G. Mostrous is an associate editor of Personal Finance . He's editor of The Silk Road Investor , a financial advisory devoted to explaining the most profitable facets of emerging global economies, and Growth Engines , a free e-zine that provides regular updates on global markets. He's also an author of The Silk Road To Riches: How You Can Profit By Investing In Asia's Newfound Prosperity .

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