Good afternoon. Don't know if you caught this.
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(C) Worth
98/06 - Jim Rogers
When to Buy Asia
By Jim Rogers
Led by China, the next superpower, Asia is certain to offer fabulous investment opportunities. The key is knowing when to get back in the hunt. Here's my plan.
Regular readers of my column know that I often equate bad news with an opportunity to invest. Call me an oddball, but I still happen to believe that the goal of every investor is to buy low and sell high. To me, that means getting in when everyone else has gotten out--when the situation appears most dire. So a lot of people have recently been asking me about Asia. They want to know if Asia isn't a perfect example of the sort of buying opportunity I advocate. After all, many Asian markets have been down as much as 80 percent from their 1997 highs. Asian businesses are reeling, the financial system is in chaos, and investment dollars are fleeing to safer havens. Yet, as my questioners are quick to note, clearly this is a momentary setback. Clearly the region will recover. Clearly its long-term prospects are bright. So isn't this, therefore, the ideal time for a farsighted investor to act?
Well, actually, no. (At this point in the discussion, I often find that the person I'm talking to is wearing a bewildered expression. So please allow me to elaborate.) I do agree that Asia is eventually going to make a lot of people rich, that its comeback is the next century's Sure Thing, and that anyone with any capital would be silly not to put some of it to work in Asia. On the other hand, I also think the region has yet to hit its true bottom. I am basically neutral on Asia at the moment. I am slightly long (with no short positions) but am waiting for the right sign to get back in in a big way.
What sort of sign? My experience in looking at markets around the world and throughout history (in stocks, bonds, currencies, real estate, and commodities) is that there is almost always what is known as a double bottom before a genuine recovery takes place. Some call it a dead-cat bounce.
When a market collapses, there eventually comes a sigh of relief. The worst, or so it appears, is finally over. Some faint good news at last kindles more buyers than sellers--"The United States is engineering a bailout" or "J. P. Morgan is buying again" or "The banking system isn't in as bad a shape as we'd thought." Typically, though, this phase provides only temporary relief, because the problems that caused the collapse have yet to be fully repaired.
This is the phase I think Asia is in now. Constructive steps to mend the Asian crisis have been taken by local and international authorities. But I highly doubt that all of Asia's economic problems have played themselves out. The banking mess in Japan is still a mess. The governments in Thailand, Indonesia, Malaysia, and South Korea are still dazed and haven't laid out workable plans for going forward, much less begun to execute them.
Indonesia--one of the three key players in the region along with China and Japan--is still unstable politically and is likely to collapse and perhaps split into several nations. Like so many holdovers from colonial days, Indonesia was never a real country to begin with, despite the Dutch proclamation that declared it so. (Its 10,000 to 15,000 islands have, so far as I know, never been accurately counted.) President Suharto's world may be coming to an end, but the people of Indonesia will continue working hard to earn their livelihoods. The nation or nations that emerge will present wonderful opportunities for investors because these many islands have extraordinary assets.
The ultimate key to Asia's rebound--the real place to watch--is China. China's economy has been growing at the phenomenal rate of 9 to 10 percent a year, and its government has been pursuing reform as fast as the system can bear it. In March, the new prime minister, Zhu Rongji, told Western journalists that, in addition to making ailing state-owned industries solvent and overhauling the country's weak banking system, he now plans the dramatic step of privatizing the housing market, as sacred a cow as exists in China.
But China is also sure to encounter serious setbacks as it races headlong into the future. One huge problem it faces is its Asian neighbors--who compete with it in world markets and whose currencies and cost structures have recently dropped by 50 to 80 percent. I predict that this new competitive pressure will produce some kind of turmoil in China. Whether it will be a currency devaluation or political upheaval, I can't say. What I do know is that history shows that nations undergoing such wrenching change rarely do so smoothly. Problems are inevitable, and the next big problem in China is going to be my buy signal. When I see on the front page of a respectable Western newspaper that there is turmoil in China, that's when I'll start buying Asia again. By then, Asian markets should be below even the low levels they're at now. This should be the true bottom.
When it's time to invest in Asia, I'll be looking for companies with strong balance sheets. I'll focus on sectors that will experience strong demand but that have low inventories and temporarily limited production capabilities. The stocks I buy could be those of companies in Australia, New Zealand, and Canada, where there are lots of expatriate Asians marketing the natural resources of their new home countries back to Asia. I may also invest in expatriate Chinese companies, or overseas Chinese companies, as they are called. Lots of them exist in Bangkok, San Francisco, and Vancouver.
Another way to play this double bottom in Asia: Buy raw materials. I recently purchased rubber futures, because Asians have been dumping inventories of rubber to obtain hard currency to pay off their bills. This is not to say that I predict great things for rubber; by the time you read this, I may have sold my position. It's just an example.
The second bottom for a market is often scarier than the first, because many folks, just starting to get their confidence back, find themselves taken by surprise. The key is to expect it and prepare for it, because assets bought in such times can offer investors returns many, many times their cost. It may also help to remember that there are forces at work broader than these temporary market swings. There's little doubt that as we march into the next century Asia is where the action will be. Any investor who doesn't understand this global shift is going to be sorry.
Jim Rogers, a Worth senior contributing editor, is an international investor and the author of Investment Biker (Adams).
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