Tuesday, November 06, 2007 and Emerging Markets Volatility

Many Chinese stocks collectively represent a huge economic bubble. Stocks like BIDU (, Inc.) are not really valued according to real returns. The ratio of Profits to actual Earnings at BIDU is nearly 200. Yet 345% YTD returns are quite irresistible, especially to experienced investors. So go ahead, dive in, at considerable risk.

PTR (PetroChina Company Limited) today is not really worth more than XOM (Exxon Mobil Corporation), no matter how many investors fool themselves into thinking it is. Shrewd investors ride the roller coaster to the highest point and then sell their shares as the dips begin. The mentality is, "Who cares what the underlying business is worth? If I can make money from the foolish choices of other investors, why not?" This is also referred to as the the Bigger Fool Theory. This mentality led to the Dotcom bubble of the late 90s and the more recent U.S. Housing Bubble.

To be sure, there are distinct differences between stocks valued only on the potential for a web site to attract visitors and stocks based on potential production profits. PetroChina could reap billions from oil fields in the Sudan and South China Sea. Baidu may give Google a run for the money in the on-line advertising business. Communist China is still a great unknown to the most astute analysts.
Skyline Seoul Korea 000006
Elsewhere in Asia, PKX (POSCO, Incorporated), IBN (ICICI Bank Limited), and MT (ArcelorMittal, Inc.) are examples of enterprises sustaining exceptional returns (i.e. greater than 50% YTD) on the basis of solid business growth. Proving it is possible to invest long term overseas and still limit the overall risk involved.

Environmental and natural resource concerns loom large over the unsustainable growth rates of several Asian economies. Delhi, Seoul, Taipei, and Beijing are literally choking on factory and auto exhausts. The amounts of copper, iron ore, oil, and gas required for growth simply may not materialize in sufficient volumes. Resources like oil or copper could eventually reach prices that absorb most profits. Investors should step back and look at the larger picture from time to time.

A large amount of the growth found in China is being fed by demand from the US and European nations. Cheap Chinese goods really help many households in the U.S. cope with reduced purchasing power. Good manufacturing jobs go to Mexico and Asia every month while people learn to live on the lower salaries paid by the Service sector. People that once worked in auto plants are now working the register at WalMart or even filling positions in a local hospital. It is a transition that threatens the dreams of many in Western nations while fulfilling aspirations of millions of young Chinese factory workers.

Investors enjoy it when speculative bubbles inflate but suffer drastic losses quickly if they do not get out when the bubble is largest. Lately, the Chinese market has performed like those puncture-proof tires found on some limousines. Actions by Chinese market regulators recently popped a hole in the bubble but the massive amount of foreign money that wants to invest in China quickly fills the hole. Even the exodus of Warren Buffet's Berkshire money failed to stem the inflows to Chinese energy shares. Besides the energy stocks this is happening in many other shares, most noticeably ( Corporation) Some investors can lose interest quickly as could be the case with BIDU but rest assured other investors will swoop in like vultures to carrion. Clever investors jump from new IPO to new IPO, cashing in quickly on the hype but always ready to take profits and move on to the next big issue.

The Emerging Markets have at least another 3 years of this hectic growth ahead of them. Overall the value of the Emerging markets shares is vastly lower than the combined GDP of the nations that make up Emerging markets (Brazil, India, Russia, and China, aka BIRC, and others). In contrast, in the Developed world (EU, US, etc.) the value of the shares is approximately equal to the GDP. Emerging Markets success is all about "room for growth" though you can still get burned by buying too high in the hot spots. Realize there is a bubble, learn to invest wisely while it exists, and take profits regularly. If you do not take profits you are just like the little kid that keeps riding the same roller coaster all day long. You miss the thrill of the other rides and could eventually get sick and lose it all.

Note: At the time of writing the author directly owns shares or owns shares in mutual funds which hold investments in those firms mentioned above.

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