Two Very Important Stock Market Investment Rules!

By: Money_and_Markets

Someone once asked the famous bank robber Willie Sutton why he robbed banks. Willie's answer was simple – “Because that's where the money is!”

You know, Sutton had a point. That's why I was very interested to hear that Kevan Watts, the head of Merrill Lynch's international division, will be moving his office from London to Hong Kong.

Guys like Watts aren't flocking to Asia to eat sushi or fried rice ... they're going because that's where the money is. Heck, a third of Goldman Sachs' 2006 pretax profits came from Asia!

So while a lot of investors are burying their heads in the sand and avoiding overseas markets, the smartest guys on Wall Street keep entrenching themselves more deeply in Asia.

Today, I want to tell you why Asia will remain the place where the money is made. And then I'll give you six ways to get a stake.

Let's start with two guiding investment principles that every investor needs to understand …

Stock Prices Follow Earnings;
Earnings Follow GDP Growth

Historically, earnings have been the most important factor in determining a company's stock price. It makes sense when you think about it: Investors want to own the most profitable companies, so they bid up the prices of the companies that make the most money.

Now, the next important question to ask is, “How do I know which companies will make the most money?” Again, history demonstrates that corporate earnings will generally correspond to the host country's overall economic growth.

Sure, there are always exceptions to this rule. But give me a booming economy, and I'll show you lots of profitable companies and a rising stock market.

Here's the key: As an investor, you need to take a close look at what parts of the world are showing the strongest economic growth. Then, invest in the best growth stocks you can find in those countries.

Don't Look to the U.S.
For the Greatest Growth

I am disappointed to say that the U.S. is not a high-growth country right now. Our economy expanded by little more than 2% over the previous 12 months. And as you'd expect, corporate earnings are now slowing down faster than a sailboat that just dropped anchor:

The fourth quarter of 2006 marked the 14th consecutive quarter of double-digit earnings growth for the S&P 500. But earnings in the first two quarters of this year are expected to rise just 4.3% and 4.4%, respectively.

Plus, even those modest expectations may be too high now that the subprime mortgage meltdown is unfolding. It could easily infect other parts of our economy. In fact, I believe there's a good chance that our rapidly weakening real estate market will pull the economy into a recession.

It seems like Federal Reserve Governor Susan Bies shares my view. Just last week, she said of falling real estate prices, “This is not the end, this is the beginning.''

There's a chance our economy will continue to chug along at a low-single-digit growth rate. That would be especially possible if Ben Bernanke and his Fed buddies lower rates and turn on the monetary spigot.

I'm not suggesting that you completely turn your back on American stocks, either. However, if you subscribe to the earnings-follows-GDP philosophy that I just laid out, then you've got to ask yourself if there are any economies around the globe growing faster than the U.S.'s uninspiring 2% rate. And the answer is, “Absolutely!”

Asian Countries Are Doubling, Tripling, Even Quintupling U.S. GDP Growth

The National People's Congress (NPC), the highest legislative body in China, just concluded its annual two-week meeting. They use this event to set the year's economic and social policies. The big news out of the meeting – China's targeting 2007 GDP growth of 8%.

What's more, the Chinese have low-balled their growth rate for years. Last year, China posted a 10.7% increase, the fourth double-digit year in a row. Of course, even the NPC's 8% target is still 400% better than what the U.S. is doing!

Want concrete indications of China's continued growth? Check these out:

• The Civil Aviation Administration of China (CAAC) said it is going to spend $6.5 billion to construct 37 new airports and enlarge 31 existing ones in the next five years.
• Suning, one of the country's leading home appliance retailers, said its 2006 profits jumped 105% in the last year thanks to booming sales of televisions, cell phones, and computers. Demand is so strong that the company opened 145 new stores in 2006!
• In China, 712,000 cars were sold in just the first two months of this year. That's a 33% increase over the same period last year.
• The country's February trade surplus hit $23.76 billion, accounting for a 41.5% increase from the previous year.

Of course, when it comes to politicians, statistics, and estimates, I'm an equal opportunity skeptic. That's why I frequently travel to Asia to see things with my own eyes.

In just a few weeks, I'll be on my way back over there to assess the situation in person. And as usual, I plan on returning to the States with a bunch of new investment opportunities. 

In the meantime, if you want to get a diversified stake in Asia, you can certainly use exchange-traded funds (ETFs). Here are six of your choices:

$19 (34% discount)

#1. iShares FTSE/Xinhua China 25 Index (FXI): This fund invests in the 25 largest and most liquid Chinese companies, such as CNOOC (NYSE: CEO), China Life Insurance (NYSE: LFC), and China Mobile (NYSE: CHL). That makes it the Chinese equivalent of the Dow Jones U.S. index.

Note: If you prefer regular ol' mutual funds, you may want to look at U.S. Global China (USCOX), a traditional mutual fund that specializes in Chinese investments.

#2. iShares MSCI Hong Kong Index (EWH): China may get all the headlines, but Hong Kong is one of the very best ways to participate in China's growth. This ETF holds a diversified basket of Hong Kong companies, with a current emphasis on banking, financial services, and real estate firms.

#3. iShares MSCI Taiwan Index (EWT): China and Hong Kong are growing at astounding paces, but Taiwan may very well end up being the cheapest way to participate in that growth. Reason: The country's stocks have been out of favor because of political tensions between Taiwan and China. But I think those problems will get ironed out, and when they do, Taiwan's stocks should surge!

#4. iShares MSCI Singapore Index (EWS): Singapore is another of the world's fastest growing economies, yet the Straights Times index of the country's stocks is trading at just 16 times earnings. That means this ETF gives you great bang for your buck.

#5. iShares MSCI Korea Index (EWY): South Korea's corporate profits are rising even faster than China's. So when it comes to translating economic growth into cold, hard profits, South Korea is a good bet.

#6. iShares MSCI Japan Index (EWJ): Japan is quite simply the blue chip way to participate in the Asian growth story. Like the story of the hare and the tortoise, it's not always who gets off to the fastest start; rather who maintains a sustainable pace. That's why the EWJ could prove to be a very productive Asian ETF over the long haul.

Best wishes,

By Tony Sagami

P.S. If you prefer to cherry-pick the very best individual companies from each of these fast-growing Asian economies, check out my Asia Stock Alert service. It'll be right up your alley!

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