Late last year, I said that a “buy everything” approach to investing in Asia wouldn’t fly in 2011. Instead, investors would have to meticulously research these markets and identify the sectors and companies poised for growth. My prediction has played out thus far in 2011 as I’ve watched investors struggle to adapt to a trendless market. The faster investors come to grips with the market’s directionless activity, the better off they will be.
However, I maintain my view that markets will break out toward the end of the year, led by emerging markets in Asia. Valuations in Asia remain subdued and Asian economies are on a trajectory for multiyear economic growth. They’ll continue to surprise on the upside for years to come.
High-flying valuations should be a cause for concern, and yet investors rarely seem worried when stocks skyrocket. Today, valuations in Asia are reasonable and yet investors are fretting over prices. It’s precisely times like these when investors should buy stocks.
In the early stage of an economic recovery, the market can be forgiving if a company misses its earnings estimates. Not so in the current phase of the recovery, when stocks trade off earnings per share. When companies deliver on earnings expectations, their shares soar higher. If they miss on earnings, stock prices collapse.
Global markets remain skittish. But sentiment should improve later in the year as investors reckon with the full impact of the economic crisis in Europe. By that time, the shape and strength of the US economic recovery should also be evident. Most important, investors will also realize that the Chinese economy isn’t on the verge of collapse.
The financial press has devoted considerable energy to predicting a looming crisis in China. It’s true that China faces a laundry list of economic and social issues that could affect the country’s economy at a future time. But China remains a command economy and investors shouldn’t bet against the central government’s well-defined policy goals.
As I noted in the April 13, 2011, issue of the Global Investment Strategist, “China Primer,” the name of the game is solid growth and social housing. Low-cost housing is expected to represent 50 percent of the country’s total housing construction in terms of units, and 35 percent in terms of floor space this year. Many have argued that China won’t be able to live up to its promises to start construction on 10 million units of low-cost housing this year. But even if the country fails to meet this target in 2011, it will do so in 2012. Consequently, investors should buy construction-related stocks during times of weakness; these stocks are one of the best ways to benefit from a recovery in China’s equity markets.
Investors should also consider allocating funds to other Asian markets during the sleepy summer months. For our top regional picks, check out the June 8, 2011, issue of the Global Investment Strategist, “Five Asian Markets to Buy this Summer.”
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