Asia Hits Another Speed Bump

September 2, 2009

Let me be clear: I still believe that China is the single most profitable place to invest right now. But there's no denying that recent events have weighed on stocks in the last week, so let me explain what's going on.

The average Chinese stock doubled from December 31 to August 1. However, explosive growth like that simply cannot continue unabated forever. While many stocks have deservedly surged due to tremendous profits and booming sales, other companies have been swept up in the general enthusiasm over the region with no proof to back up their success.

The reasons behind the latest bout of selling pressure was very much the same as those behind the consolidation we saw two weeks ago. Investors are concerned that a surge in IPOs and the issuance of new shares from leading companies will dilute shareholders and soak up any extra cash in the markets. There's also fear that lending is starting to slow in Asia and that the flow of money in the region is getting sluggish.

Throwing fuel on the fire was news that Japan's voters rejected the ruling party that has been in power for over 50 years. The most recent GDP numbers for Japan showed this nation has at long last pulled out of an economic tailspin, posting positive economic growth for the second quarter of this year in large part due to partnerships with China. The political shakeup added a dark cloud of uncertainty to what appeared to be a steady recovery, and caused havoc in Asian markets.

I'm not going to speculate on which party is best for Japan, but I can say that watching changes in leadership and politics is part of being a global investor. These changes can create temporary volatility, but will quickly be digested as the world gets acquainted with the new party.

It's important not to get caught up in the knee-jerk reaction of the broader market. I favor stocks that trade on the NYSE as "American Depositary Reciepts," or ADRs. These tend to be much safer investments than companies traded on foreign exchanges. This grants us a lower level of risk thanks to stricter U.S. regulations, and has kept my favorite stocks from dropping as sharply as their counterparts on the Shanghai index.

China is still the leading force of economic growth and will remain a key part of my Buy Lists. The latest numbers prove that there is no better place to invest right now. Last week, the World Trade Organization announced that China passed Germany in exports for the first six months this year. Specifically, China exported goods worth $521.7 billion. This is a strong indication that there is no bubble bursting in China but simply a brief period of contraction that is natural after such tremendous success.

No stock–or regional economy for that matter–can experience steep growth month after month without taking a breather. After this pause, I expect Chinese companies to experience another surge in the coming weeks.

In these volatile times, your best defense is a strong offense of fundamentally superior stocks. Make the wrong choices and your already battered portfolio could suffer even more. Make the right moves though, and you can ensure your portfolio posts profits for the entire year. The actions you take now could make or break your performance this year. Today accept your copy of the 2009 Investing Guide, absolutely FREE, so that you can get a look at the opportunities and the dangers that investors will confront in 2009.