Sell US Stock Market Rallies and Buy Asian Dips
Stock-Markets / Chinese Stock Market Feb 14, 2008 - 01:44 PM GMT
Larry Edelson writes: Have Asian economies delinked from the U.S. or not? Are they independent of each other? Now that the U.S has caught a cold (recession), will the rest of the world, especially Asia, catch it?
These seem to be the major questions on investors' minds these days, from Wall Street to Main Street. And who can blame them for wondering?
After all, more than $423.4 billion in foreign investment has poured into Asia and Southeast Asia just in the past two years. So there's a huge amount of new money at risk.
And if Asia is as dependent upon the U.S. as it has been in the past, then Asian economies and stock markets are going to get hit hard, which, in turn, will create a vicious downturn, pulling the U.S. indexes even lower.
So today I want to take a hard look at the relationship between Asia and the U.S., and I'll do my best to provide you with the most objective answers to the foregoing questions.
First, let me say right up front that there are NEVER any absolutes in economics. So, at the risk of sounding ambiguous, the answer to the above questions is: Yes and no.
Let me explain ...
Yes, Asian Economies Are More Independent Of the U.S. Economy Than EVER Before
When I look at the recent economic statistics, I don't see how anyone can honestly claim that Asia is still completely beholden to the U.S. economy.
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| China, and other Asian countries, have piles of money in reserve. |
Of the 11 major Asian and Southeast Asian economies (comprised of China, Japan, India, Taiwan, South Korea, Singapore, Hong Kong, Malaysia, Thailand, Indonesia and the Philippines) ...
- Eight have current account surpluses.
- Eight have more than $100 billion in reserves, with China having the largest in the world (currently $1.528 trillion).
- Ten of them (Japan is the exception) are growing at a faster rate than the U.S., by factors ranging from two times U.S. economic growth to as much as 4.6 times in the case of China.
- With the exception of China, all have unpegged their currencies from the U.S. dollar and from fixed-rate currency regimes. As a result, their economies are more flexible.
It doesn't take a rocket scientist to conclude that all of this evidence points to an Asia that's not only economically stronger than it was just five or ten years ago, but also one that is far less dependent upon the U.S. than ever before.
However ...
Asian Economies Do Not Operate In a Vacuum
No country does. To think that Asian economies are 100% decoupled from the U.S. economy is foolish. They still ...
- Account for more than 30% of U.S. imports .
- Represent almost two-thirds of the world's foreign currency reserves, money that is by and large invested in U.S. dollars.
- Receive more foreign investment from the U.S. than any other region .
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| Exports to the U.S. are still important, but Asian economies have become more independent in recent years. |
Plus, there is no denying the psychology of economies and markets today. Especially in an era of lightning fast communications via e-mail and the Internet, herding behavior can spread around global markets more rapidly than ever before.
So in this sense, Asian markets are more connected to the U.S. markets than they previously were. As a result, a panic in the U.S. can easily set off a panic in Asian economies, regardless of their stronger fundamentals.
Indeed, we've already seen this in the latest bear move – weakness started in the U.S., but the Shanghai Composite Index lost almost 32% of its value during the recent decline.
But as I pointed out two weeks ago , that sell-off was way overdone in relation to the underlying fundamentals in China, which remain VERY strong, to say the least.
That's why I told you China represented one of the best buying opportunities around, and I suggested using the pullback to buy the FXI or the U.S. Global Investors China Regional Opportunity Fund (USCOX) .
So to summarize, here are my three important conclusions ...
Conclusion #1: Asian Economies Are More Resilient Than Ever Before
While Asian economies still have ties to the U.S., there's no question in my mind that they are less dependent on the U.S. than they have ever been.
Their economies are also stronger ... more self-sufficient ... and more resilient than they've ever been ... due to their accumulation of foreign reserves as well as their current account and trade surpluses, and more.
Conclusion #2: I Still Suggest You Buy the Dips in Asia!
Asian economies and stock markets remain in long-term bull markets. So when you see declines in Asian markets, consider using them as buying opportunities.
There's tons of money to be made in the Asian markets – now and for years to come. And it's easier than ever before to buy into these markets.
Investments like the previously mentioned FXI and USCOX are terrific. And there are many more Asian plays ripe for the picking now as well.
Conclusion #3: Make Sure You Are Holding ONLY Natural Resource Stocks And Gold in the U.S.
As I've noted in previous issues and in my Real Wealth Report forecast issue, all of my indicators suggest that the U.S. economy and broad stock markets are now in a bear market.
Don't wait for think tanks or Washington to officially announce the U.S. is in a recession. By the time they do, it will be too late – and the economy will be much closer to the end of the recession than at the beginning.
I still fully expect to see 11,000 on the Dow Jones Industrials, and possibly lower. So I suggest using these rallies you're seeing to get out of nearly ALL U.S. stocks you own, including tech stocks.
The ONLY stocks I consider worth holding are natural resource shares – energy, food, etc. Although these issues are not immune to declines either, many of them will buck a downturn in the broader markets.
Lastly, make sure you're holding gold in this environment. Central banks around the world – not just the U.S. – are pumping dollars into the global economy like never before.
Despite what they publicly say or admit to, politicians and central bankers want as much inflation now as possible. It is the ONLY way out of the credit crisis in the U.S.
Whether or not it will work remains to be seen. But one thing is for sure ... high inflation will send natural resource stocks and gold rocketing higher.
Best wishes,
Larry
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