Where to Make Money in Asia

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Investors in Asia have had a rough 2012. Many Asian stock markets are struggling. They are caught up in negative investor sentiment and the impact of the faster-than-expected economic slowdown in China.

While I am staying away from China and Chinese-linked markets like Hong Kong and Taiwan, I see several long-term investment opportunities in Asia, including one that I have called “the cheapest asset class in the world.”

Note that all of these are currently “buy” recommendations in my monthly investment service, The Alpha Investor Letter.

1. iShares MSCI Singapore Index (EWS)

Over the past 40 years, Singapore has transformed itself from an economic backwater to an “Asian Tiger” success story. When this former British colony became a fully independent country in 1965, its per capita gross domestic product (GDP) was a lowly $511. Today, that figure has risen to $59,711, making Singapore wealthier per person than the United States.

Singapore’s low levels of corruption, skilled workforce, stable environment, and efficient infrastructure have made it arguably the greatest economic success story among the Asian Tigers. Singapore has been ranked #1 in global innovation and competitiveness. It’s ranked first for having the most open economy for international trade and investment. And it’s the world’s easiest place to do business. The country’s corporate tax is a mere 17% and personal taxes are only 20% on incomes over $300,000 Singaporean dollars ($213,000). In the midst of the Great Recession, unemployment never hit higher than 3.4% — a figure unimaginable to most Western economists.

Singapore’s stock market has regained momentum, and has outperformed the U.S. S&P 500 over the past three months.

The iShares MSCI Singapore Index (EWS) versus the S&P 500
2. iShares MSCI South Korea Index (EWY)

Half a century ago, South Korea’s economy was as poverty stricken as Upper Volta. Today, South Korea has transformed itself into the world’s 10th-largest economy. Thanks to the “miracle on the Han river” — named after the river that runs through its capital, Seoul — per capita annual income grew from $87 in 1962 to $22,778 in 2011.

Since its inauspicious beginning, Korea transformed itself into a world leader in shipping, semiconductors, digital displays and consumer electronics. Once the butt of late-night TV jokes, Korean automobile manufacturers such as Hyundai have surpassed German rivals Mercedes and BMW in quality surveys.

There is no higher-profile emblem of South Korea’s success than consumer electronics giant Samsung. In 2012, Samsung’s sales will exceed $200 billion — close to triple that of Microsoft — along with a reputation for making hip-and-sophisticated smartphones, televisions and digital cameras. Samsung’s stock market capitalization, at over $175 billion, is more than 14 times that of Sony and is second only to Apple among consumer electronics companies.

Since launching in May of 2000, the South Korean ETF has more than tripled, while the S&P 500 has been negative.

The iShares MSCI South Korea Index (EWY) versus the S&P 500

3. iShares MSCI Malaysia Index (EWM)

Once a sleepy Southeast Asian backwater, Malaysia is the fifth “Asian Tiger” — a worthy addition to the ranks of the original “Asian Tigers” of Hong Kong, Singapore, South Korea and Taiwan. Today, Malaysia is the second wealthiest country in all of Southeast Asia, with a per capita gross domestic product of $8,209.

Like many of the Asian Tigers, over the past 50 years, Malaysia has exerted enormous effort to lift itself from poverty to bootstrap its economy into the modern world. But unlike in free-wheeling, capitalist Hong Kong, Malaysia’s economic development is driven by one government plan after another.

The Asian crisis forever changed the scope of Malaysia’s ambitions and the country never recovered from the go-go feel of the booming 1990s. At various times, the Kuala Lumpur Stock Exchange (KLSE) was the most active exchange in the world, with trading volume exceeding even the New York Stock Exchange. While the pace of development in Malaysia today is not as rapid or flashy, it has become more sustainable.

Malaysia’s stock market has also substantially outperformed the U.S. market over the past five years.

The iShares MSCI Malaysia Index (EWM) versus the S&P 500

4. The Market Vectors Indonesia ETF (IDX)

Few markets in the world have enjoyed as much of a turnaround in investor sentiment as Indonesia. As the world’s fourth-largest country with a population of 242 million, Indonesia boasts a young-and-growing population. Once the sick man of South Asia, economic reforms initiated in 2004 have helped make it official Indonesian policy to add another “I” to the “BRIC” (Brazil, Russia, India, and China) acronym. With the International Monetary Fund (IMF) forecasting that Indonesia will grow 6.1% in 2012, it is set to outperform several of its BRIC rivals.

Still, Indonesia remains off the radar for most investors, even as it is among the few global markets that managed to maintain its upward momentum over the past few years. Although the market has slowed down in 2012, Indonesia was one of the top-performing stock markets of 2010 and 2011. The Van Eck’s Market Vectors Indonesia ETF (IDX) has more than tripled since its launch in March of 2009 — far outpacing the U.S. S&P 500.

The Market Vectors Indonesia ETF (IDX) versus the S&P 500

5.The WisdomTree Japan SmallCap Dividend (DFJ)

Two decades ago, Japan attracted the frenzied admiration of the world. Tokyo was one of the world’s great trading centers alongside Wall Street.

How things have changed. The great Japanese bear market now has lasted twice as long as any other secular bear market on record. Since the collapse of the Nikkei in 1989, trading volumes in Japanese small caps have all but evaporated. Investment banks and brokerages produce next to no research on the sector. And what little research there is, it rarely gets translated into English.

Yet, investors have never seen such low valuations in the history of a developed economy. Today, Japan has as many as 200 listed companies trading below cash on the books. That means you can buy these companies for free.

As of March 31, 2011, the companies in DFJ were valued at a mere 0.30 times price to sales and 0.69 to book value. By way of comparison, Nasdaq stocks now trade at 1.95 times sales and 3.02 times book value. Japanese small caps could rise over five-fold before matching U.S. valuations.

Since launching in June 2006, the WisdomTree Japan SmallCap Dividend (DFJ) has essentially matched the performance of the S&P 500.

The WisdomTree Japan SmallCap Dividend (DFJ) versus the S&P 500

Nicholas A. Vardy
Editor,The Global Guru

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