ASEAN: One Region, 10 Countries — Infinite Profit Opportunities (ASEA, EWM, THD, IDX)
Tony Sagami: Chinese stocks started off with a bang this year, rallying by 10% in January and February, but struggling since Premier Wen Jiabao lowered China’s 2012 GDP growth forecast from 8% to 7.5% on March 5.
Since then, a growing number of analysts and China observers have turned cautious on China. The most recent naysayer was the Asian analyst from Bank Julius Baer & Co.:
“In the coming three months, the rally has ended. The economic slowdown will continue for a while and there are over-expectations on policy. It’s a fact that the economic slowdown in China is negative on profitability.”
This comment came on the heels of two pieces of worrisome data that came out of China last week.
Trouble Sign No. 1: The National Bureau of Statistics reported on March 27 that profits of Chinese industrial companies reported a composite loss of 5.2% in the first two months of 2012. That is a huge turnaround from a 34.3% gain a year earlier.
Trouble Sign No. 2: The year-over-year increase in profits from companies that have reported results so far has been 17% on average. That is 3.6% below expectations and way, way below the average 38% increase in the previous year.
Time will tell whether the above signs are the tip of the iceberg or just a short-term bump, but there are still lots of reasons to be optimistic.
For example, most China worrywarts are overlooking just how cheap Chinese stocks have become. On a valuation basis, Chinese stocks have become very attractive. The average Chinese stock is now selling for only 9.5 times earnings.
Perhaps more importantly, the all-time low price-to-earnings (P/E) valuation for Chinese stocks in 8.9 times earnings, so we may soon be staring at a great buying opportunity.
Compared to U.S. stocks, China looks even cheaper. Stocks in the S&P 500 are selling for an average of 13.5 times earnings, which means that Chinese stocks are 29% cheaper than U.S. stocks as measured by P/E ratios.
You tell me: Are Chinese stocks a better value than U.S. stocks?
Sure, the reasons to invest in China may be a bit less-compelling these days, and some investors may be reluctant to put new money in Chinese stocks. But whether you are a China bull or a China bear, you shouldn’t forget that there is a lot more to Asia than just China.
In fact, some of China’s neighbors are among the most-prosperous countries in the world, the fastest-growing economies in the world, and offer some of the most-attractive investment opportunities in the world.
No, I’m not talking about South Korea or Japan. I’m talking about the ASEAN nations.
One Region, 10 Countries — Infinite Profit Opportunities!
Few American investors have heard of the Association of Southeast Asian Nations, or ASEAN, but it is a powder keg of opportunity.
ASEAN is a geo-political and economic organization of 10 countries located in Southeast Asia that are working together to cross-promote each other’s economic and humanitarian growth.
ASEAN was formed in 1967 when the leaders of five countries — Indonesia, Malaysia, Philippines, Singapore and Thailand — joined forces in an effort to promote economic coordination and regional free trade.
The membership base has changed over the year, adding Brunei, Burma/Myanmar, Cambodia, Laos and Vietnam.
With a population of almost 600 million people, the ASEAN region has an economy bigger than India. Plus, it has aggregate stock market capitalization of $1.8 billion, making it larger than both India and Brazil.
The ASEAN region is thriving thanks to low labor costs, rich natural resources, strong relationships with China and a wave of economic liberalizations that have encouraged foreign investment.
The ASEAN countries are a major force in international trade (hitting US$1.5 trillion last year). But its largest trading partner is China.
ASEAN did US$178 billion worth of trade with China last year, but that number jumps by another $68 billion if you include Hong Kong.
Is it Time to Follow These Money Flows?
The so-called “smart money” — institutional and corporate money — is pouring into the region. Foreign direct investment (FDI) into ASEAN has tripled in the last three years.
If you want to follow that institutional money in ASEAN, it is easy with the Global X FTSE ASEAN 40 ETF (NYSEARCA:ASEA), which is the first ETF to focus on this region.
This ETF aims to replicate the performance of the FTSE/ASEAN 40 Index, an index that is made up of the 40 largest companies in the original five ASEAN countries: Indonesia, Malaysia, Philippines, Singapore and Thailand.
Singapore has the largest weighting of the index with 41%, followed by Malaysia (33%), Indonesia (16%) and Thailand (9%). The Philippines makes up less than 1% of ASEA.
You should note that this ETF has zero exposure to Brunei, Burma/Myanmar, Cambodia, Laos and Vietnam. However, those markets are underdeveloped, shallow, extremely volatile and difficult for U.S. investors to buy into.
ASEA is heavily weighted with financial services and banks with 40% assets, followed by telecom (16%), industrials (15%), and consumer discretionary (11%) stocks. The largest individual holdings include DBS Group Holdings, Singapore Telecom and Oversea-Chinese Banking Corp.
Now, I’m not suggesting that you rush out and buy this ETF or any other stocks or funds that represent the ASEAN member regions individually. As always, timing is everything, so I recommend that you wait for my buy signal in Asia Stock Alert before jumping in.
However, the ASEAN countries are some of the most-vibrant economies in the world and a region that deserves some of your investment attention.
Related: iShares MSCI Malaysia Index (NYSEARCA:EWM), Market Vectors Indonesia Index ETF (NYSEARCA:IDX), iShares MSCI Thailand Invest Mkt Index (NYSEARCA:THD)
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended inUWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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