Is buying emerging markets financial suicide? (page 2 of 2)

Such an observation is also supported by the structural shift of foreign directs investment flow. Presently, more than twice as much money flows into China than into the rest of Asia (ex-Japan) combined compared to the late 1980s when FDI's into China where far lower than into the rest of Asia.

Now, I do admit that this scenario of slow future export growth in Asia, together with the emergence of China as the leading manufacturer in the world is not particularly positive for most of Asia's economies. But remember that corporate profitability is another matter, altogether. Take for instance a Taiwanese or Japanese manufacturer. By shifting production into China, it badly damages the local economy as workers are laid off and factories closed. However, such a manufacturer can boost its own profits, as costs are reduced significantly and as it gains access to the domestic Mainland Chinese market.

So we see that there can be a diverging trend between the performance of the overall economy, which as a result of production shifts suffers, and individual companies' profitability. Just think of what would occur to Japan's economy if overnight every Japanese company decided to shift 25% of its manufacturing capacity to China but how these companies' profitability would at the same time improve.

Once again, I am stressing here that selectivity of one's investments will be in future the key to success in Asia. Unlike in the past, where Asia was largely in a 'win-win' type of environment, we will now have to increasingly deal with 'winners' as well as 'losers.'

Let me offer some thoughts. In China, increasingly, domestic manufacturers whose competitive position is improving will squeeze out foreign companies such as cellular phone manufacturers, which relied heavily selling their products into China. Also, as more and more foreign companies start to produce in China, its domestic economy will remain robust and lead to rising property prices in the long run.

In this respect, I believe that Shanghai properties are one of the most interesting investments at the present time. In India, I can see that the software industry will continue to grow. The Indian software industry will not only penetrate the domestic market but it will also gain market share from software providers in Europe and the US thanks to its cost advantages.

India's drug industry will also grow rapidly, since it will largely ignore foreign patent rights and over time develop more and more its own drugs. In Thailand, it is obvious that in the long run the manufacturing sector has little chance against Chinese manufacturers, but as China becomes more prosperous, Thailand's tourist industry will thrive on the back of zillions of Chinese visitors.

Similarly, natural resource producing sectors of countries such as Malaysia, Indonesia, Vietnam, and also Australia and New Zealand will do well as China may one day become the world's largest importer of commodities such as coffee, cocoa, copper, plywood, timber, grains, and meat.

At the same time China will expand its political clout in Asia and as a result will also become a capital exporter to Asian countries, which are of some strategic importance such as Myanmar, Cambodia, the entire Central Asian region and Far East Russia.

In fact, the Russian Far East could be for a while a major beneficiary of China's growth as it can supply China with all its resource wealth. (Asian opportunities aside, I incidentally believe that the Russian stock market has over the next two years the greatest up-side potential).

So we can see that while slower export growth rates and the emergence of China as the region's dominant economy will not be very good for overall economic growth rates in Asia, some sectors of its economy will benefit from China's rising prosperity.

And since Asian equities have under-performed the western markets so badly since 1990 and often sell for single digit P/Es with high and secure dividends, I remain confident that investments in selected sectors in the region is the right move. It is not akin to 'financial suicide', but a very timely shift from the developed western markets, which are likely to perform poorly for quite some time.