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How to Invest in Asia

Fri, Jul 11 2008, 14:47 GMT
by Tony Sagami

Money and Markets

Hardship breeds success.

That's true for individuals, companies even entire nations. And it's also true for me, Tony Sagami, Asia Specialist at Money and Markets.

It's why the United States sprang forward after the Great Depression. It's why China, Japan and even formerly dirt-poor India are leaping ahead today.

And it's a fundamental principle that can unlock great investment opportunities for you in the months ahead.

In a moment, I'll show you exactly how and where. But first, let me tell you where I come from — so you can better understand why I believe in this so passionately.

Tokyo, 1955
In a small noodle shop in Tokyo, a beautiful young waitress serves American GIs stationed at a nearby base. That's considered acceptable behavior.

But then she courageously ventures to go out on a date with a young soldier. That's not so acceptable.

She speaks very little English; and the solider, even less Japanese. Still, the romance blossoms, and they're married after a few months' courtship.

Like clockwork, I come nine months later, and life is wonderful for the young couple.

My father is no Marlon Brando. And I don't like clichés. But if my story conjures memories of the movie "Sayonara," the images you remember are probably not very different from the scenes I'm describing.

Soon, however, the soldier is transferred back to Ft. Lewis near Tacoma, Washington. And before we can join him, my mother and I have to wait months in Japan for space on a naval transport ship.

The queue is long and hundreds of other war brides are ahead of us.

"Onegai! Amerika-ni ikanaide!" are the last words of desperation my grandmother shouts as she watches the ship depart.

"Please! Don't go to America!"

Tacoma, 1957
My mother should have listened — her marriage was over the day my father left Japan.

When our ship arrives, we find ourselves in a strange land with no family, no friends, and no money. We spend our first two months in America living under a bridge.

For food, Mom rummages in garbage cans. Her favorites: The ones outside a Chinese restaurant where she can find still-edible white rice.

But despite our plight, my mother refuses to return to Japan. "In America," she later drills into my head, "you can make something of your life if you study hard and work hard."

Fortunately, on a cold Saturday night, a kind stranger, also a waitress, finds us behind the Chinese restaurant. She takes us into her home and becomes our personal savior. Her church adopts us and introduces my mother to Ken Sagami, a humble vegetable farmer who becomes my new father.

Intensive truck farming — maximizing the soil's yield with hard labor, the most advanced irrigation techniques, and some gutsy risk-taking — is all he knows.

But in the Japanese immigrant community, it's the foundation for the success of future generations.

Success
That's what happens with Mom and me. Our first months of hardship are replaced by many years of hard work on the farm. That, in itself, is a vast improvement in our lot.

And ultimately, hard work on the farm has led me to some great successes in my life.

Today, in addition to writing every Tuesday for Money and Markets and for Weiss Global Investment Services, I own a successful money management business and two technology companies. But my best times have been traveling back to my native Japan, discovering the roots of Japanese culture in China, and exploring the rest of Asia to find wealth-building wonders for investors.

Here are some of the things I've discovered …

Japan: Gloom and Malaise Breed New Successes

I'm truly enthusiastic about what I see in Japan today. And that's not because it's the country where I was born.

It's because a decade of depression and tough times have primed Japanese companies, especially tech companies, for an impressive comeback.

An article from the New York Times perfectly tells the story:

• "College graduates face the best job market in a decade, and wages are rising again. The lead stock market index has doubled in value in two years. Corporate profits are the highest in recent memory. And for the first time since 1990, land prices in Tokyo are up.
• "Could it be that Japan, long the sick man among major global economies, has finally recovered?
• "This is, after all, the country where the words 'gloom' and 'malaise' have been used for so long that many Japanese have come to view them as facts of life …
• "But this time, most economists and analysts agree, the recovery seems to be real, its roots extending through the Japanese economy. After more than a decade of working off excessive debt, bloated payrolls and overbuilt factory capacity, Japan seems to have addressed its bubble-era problems and emerged leaner and more competitive …
• "Companies are investing heavily in new technology … For the last 12 years, Japan has spent more on research and development as a percentage of the economy than any other major industrial nation, according to the Organization for Economic Cooperation and Development."

Now, as the gloom and malaise disappear, the successes are emerging one after another.

What's driving Japan's new, emerging boom? Part of it is the fact that Japan's partnership with China is so close and so capital intensive.

But that's only half the story.

The other half is that Japan's new generation is avoiding most of the blunders and extravagances that are still plaguing many U.S. companies.

Indeed, the still-prevailing attitude in Japan reminds me — to some degree — of the spirit that my parents brought me up with:

Debt avoidance.

Hard work.

No luxuries and no nonsense.

Here's How U.S. Investors Can Reap The Benefits …

Think Global: Expand your investment universe to include Asian stocks. A good place to start your search is with foreign stocks that are listed on the NYSE, as American Depository Receipts (ADRs).

For example, you can buy shares in companies like Honda, Hitachi, Mitsubishi, Nissan, and Sony. Sony, in particular, is a bellwether for the Japanese technology sector.

Also Think Small: The best opportunities are usually found in stocks that you've never heard of. That's doubly true when you're talking about foreign countries.

Sony, for example, is revolutionizing the DVD world with its new Blu-Ray Discs, or BD-ROM, but the company is so large that even a home run won't have a significant impact on its bottom line.

In contrast, companies like Nippon Electric Glass — the world's third largest manufacturer of LCD glass, used for high-definition screens — is small enough to make a mountain of money from that new technology.

Think Picks and Shovels: Most of my peers are looking for the next new, red-hot, super-sexy technological breakthrough.

Not me.

I'm convinced that the best tech profits are going to be found in companies that provide the electronic equivalent of picks and shovels for risk-taking, hard-working innovators. Like Levi Strauss did in the California gold rush. He made money and kept it. Most of the prospectors either never made it or never kept it.

And many of the most profitable pick-and-shovel providers are to be found in Asia because of the cheaper wages and lower business costs.

For example, Inventec Appliances is the biggest supplier of iPod components to Apple Computer and it's made money hand over fist.

I'm not suggesting that you should completely abandon U.S. tech stocks. A few American companies could offer some good growth at the right time.

But if you want the 10-baggers that Peter Lynch used to talk about, join me now on a virtual trip across the Pacific.

And always remember: We don't want companies that depend on luck or spend on luxury. To greatly improve your chances of reaping big profits and large yields, we want solid evidence of fertile land, good technology, hard work, and even past hardships.

My Four Rules for Investing in Asia

• 1. Buy-hold-and-pray won't work. For the last four years, even dart-throwing monkeys made money investing in China. Going forward, I think investors will need to be more nimble. Don't hesitate to take profits after large moves, and use defensive strategies like protective stop losses to manage risk.
• 2. Don't ignore more focused investments like ADRs. Exchange-traded funds have exploded in popularity, and they're an excellent way to get a diversified stake in specific countries or regions. However, don't ignore great individual companies, either. Some wonderful firms make it especially easy for U.S. investors by listing American Depositary Receipts (ADRs) on our exchanges.
• 3. Pick the right sectors and industries. In my opinion, one of the keys to profiting from the Asian growth miracle is concentrating on the right areas. (See my next chapter for my favorite areas).
• 4. Don't get stuck in just one country. While China's stocks have bounced like a super ball, many other Asian markets are still on sale. And as I mentioned earlier, a lot of them have spectacular growth prospects.

For example, here are …

Three Asian Industries That Look Absolutely Unstoppable to Me

As an investor, you get to put your money to work in practically any kind of business imaginable. So, here's an important question: What kind of businesses in Asia look poised to grow? My answers …

Construction: You need look no further than China to understand why this industry has such great prospects. The country is throwing up giant skyscrapers … paving new roads … and building new power plants.

Maybe you think it's too late to get in? Well, if anything, I think activity will pick up — not slow down — as the 2008 Olympics approach. We still have another year or two left in this cycle, and that's plenty of time for some of these stocks to double.

Cargo and Containers: One trip to Wal-Mart will prove that China has become the world's manufacturing center. Today, just about everything on store shelves was made in China (or some other Asian country).

But it's hard to consistently figure out who will make the next hot product. That's why I like companies involved in transporting goods from factory floors to store shelves. No matter what the hot product may be, they still get a nice steady and growing stream of business.

And you have tons of choices in this sector: You can buy shares of companies that run China's toll roads. You can put your money into railroad companies. And you can also consider port operators, since almost every item eventually boards a ship.

Plus, I do like some manufacturers and retailers. Particularly the ones that cater to …

Chuppies: Asia is all about consumption. Every time I visit, I'm bowled over by the sheer volume of shopping going on. I'm not talking about people buying crappy t-shirts, either.

Quite to the contrary, millions of Chinese yuppies (known as "Chuppies") are snapping up cell phones … staying at lavish hotels … gambling at casinos … buying fancy cars … and sporting expensive jewelry.

Follow my rules. Focus on these industries. And you should do very well indeed.

One last thing …

There Are Five Easy Ways to Invest in Asia

I want to make something clear — I'm not suggesting that you abandon all of your U.S. holdings.

However, I do think it's foolish to have your portfolio entirely invested in any one country, especially if it's the slow-growing U.S. There's no excuse for that nowadays. Not when you have so many ways to invest abroad. Here are just five of the ways to invest in Asia:

First, you can buy a mutual fund that's focused on either one or more Asian countries. Three I like are U.S. Global's China Region Opportunity (USCOX), Fidelity's China Region (FHKCX), and T. Rowe Price's New Asia (PRASX).

Second, consider exchange-traded funds (ETFs). These investments give you a diversified stake in specific regions, they're easily bought and sold, and they generally carry lower fees than mutual funds. (For more on ETFs, see our special report, The ETF Advantage for Growing Wealthy Globally).

Third, you can buy shares of Asian companies that trade on American exchanges. Many come in the form of American Depositary Receipts (ADRs), which are U.S.-listed stocks that trade exactly like their foreign-listed counterparts.

Fourth, if your broker has a foreign trading desk, you can buy shares of Asian companies that are listed on foreign exchanges. This isn't nearly as hard as many people think. A lot of the most attractive Chinese companies are listed on the Hong Kong Stock Exchange, but some can also be found on exchanges in Singapore, London, Shenzhen, and Shanghai.

Fifth, there are some American companies that are getting it right overseas. You've got to choose carefully, but U.S. firms with strong presences in Asia are one last familiar way for you to get a stake in economies that are absolutely trouncing the paltry growth happening on American soil.

Published on  Fri, Jul 11 2008, 14:47 GMT

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