AUGUST BLUES
by Yiannis G. Mostrous
Editor, Growth Engines
August 16, 2007

August is traditionally a weak month for Asian markets. And given the turmoil surrounding the global financial system, this weakness has been understandably magnified in 2007.

Right now, I see the current situation as a correction in a bull market. There are risks out there, so keep a clear head.

But buying opportunities often present themselves during times of negativity. Now seems to be one of those times.

Investors that have been wise enough to book some profits early should be looking for new opportunities because, at one point in this correction, cash holders will be kings. Asia as well as the fast-growing economies of Eastern Europe and certain Western European companies with significant exposure to emerging markets should be preferred. Financials, exposed more than any other sector to the current malaise, are gradually offering good value.

There's, of course, the ultra-bearish argument out there that calls for the end of the financial system as we know it or, as it’s been nuanced during the past five years, a global financial collapse.

I’m not ready to bet on such an outcome, although the selloff could become worse before it gets better. With regard to Asia, embedded bears have spread their negativity on the region since the beginning of the year--and, therefore, missed out on a 30 percent rally to the 2007 top established July 24.

Those gains, on top of the big gains accumulated in Asia during the past five years, explain why the region’s markets have sold off violently at times since July 24. When money managers need to cover losses elsewhere, they sell the markets where they have the biggest profits--throwing the baby out with the bathwater.

Funds have also moved to the so-called safe haven of the US market. There's no doubt it’s happening, though it borders the moronic. It is, after all, the US economy and its securitization industry are the sources of the problems everyone’s so worried about this time around.

Putting your money in a market with a slowing economy and a financial system coping with significant new challenges is bizarre. If you don’t want to invest in the high-risk markets of the East because of the subprime woes in the US and the related collateralized debt obligation (CDO) fiasco, buy gold and short the US consumer instead.

Looking beyond the current situation, Asia remains the region of choice for serious long-term investors. Asia is leading a great global economic transformation and will be the engine of growth for years to come. And the region ex-Japan is still enjoying a long-term bull market that commenced at the bottom of the 1998 Asian Crisis.

The events of 10 years ago have proven to be a fortunate catharsis for the region. The main reason I like the long-term Asian investment theme is the economic reform, the moves toward privatization and the commitment to free trade that emerged from the crisis and have since defined Asian governments and the region’s economic establishment. This economic transformation is still in its early stages; these numbers will improve over time.

Economies and earnings in the region continue to be strong and are accelerating in some cases. Savings rates are still high, salaries and property prices continue to rise, and consumption is on an uptrend. Look for Asia to surprise to the upside during the second half of 2007.

Some of my preferred markets that should be accumulated, especially if further selling weakens the market substantially, are South Korea, Hong Kong, India, Russia, Malaysia and Singapore.

© 2007 Yiannis G. Mostrous
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