Boldly Rebuffing the Bear

Rampant inflation in India, as well as troublesome price increases in China, have caused respective monetary authorities to limit borrowing. Investors rarely celebrate higher interest rates or bank reserve restrictions.

Equally disturbing, ultra-slow growth in the developed world hinders emerging economy exporting. Moreover, the sovereign debt uncertainty in Europe, as well as in the United States, presents additional challenges for manufacturers across Asia.

The result? Bear markets for SPDR S&P China (GXC) and WisdomTree India Earnings (EPI).

That said, China’s growth engine is still firing on all cylinders. Exports on the mainland jumped more than 20% from one year ago, in spite of weakening economies across industrialized nations. Exports also grew more in July than they did in June.

Additionally, imports rose more than 20% year-over-year. This suggests that wholesalers and consumers haven’t exactly been cutting back their spending in China lately. Moreover, China is still on target for 9%+ for 2011 GDP.

The question is, who stands to benefit the most from rising imports in China? Which economies tend to grow when China’s gross domestic product expands?

For years, I’ve argued that smaller Asian neighbors benefit the most. Places like Malaysia, South Korea, Thailand, Taiwan and Indonesia fit the bill.

Consider the following feature articles:

1. June 21, 2010. China’s Asian Neighbors Have The Most Attractive Stock ETFs.
2. November 5, 2009. Don’t Overlook The Malaysia ETF.  

Right now, direct access to China may not be the best investment. The fundamental picture for corporate profits may look superb, but inflation uncertainty persists.

Yet indirect access to China, India and even Japan, is still paying dividends for a number of Asian neighbors. For instance, Indonesia is well-situated to be China’s third largest trading partner. In fact, Indonesian GDP is currently 6.5% and the country has a balanced budget.

Malaysia is equally impressive in its own right. It is Japan’s 3rd largest trading partner, and it has been a major force in the country’s efforts to rebuild. Malaysia is expected to finish 2011 with 5.0% GDP growth, negligible inflation and a mere 3% unemployment! These are just a few reasons that iShares MSCI Malaysia (EWM) has remained one of my top holdings for well over 2 years.

Here’s how well Thailand, Malaysia and Indonesia have held up in 2011:

3 Terrific Asian Neighbor ETFs in 2011
						Approx % YTD (Through 8/9)
Market Vectors Indonesia (IDX)						5.1%
iShares MSCI Thailand (THD)						4.1%
iShares MSCI Malaysia (EWM)						0.0%
SPDR S&P 500 Trust (SPY)						-5.7%
Vanguard Emerging Markets (VWO)						-12.1%