The Shanghai A-Share Index shows no end in sight to the precipitous drop in Chinese stocks. The Chinese stock market is a deflating bubble. Why anybody would be so bullish on China in the first place is a mystery to me.
Most Chinese companies are low-end manufacturing businesses that prosper primarily because the labor is cheap and the yuan is undervalued. There are no sustainable competitive advantages here, and few, if any, Chinese companies have pricing power. Low-end Chinese manufacturing companies compete primarily on cost.
Investors have wondered where to invest outside the United States. Some countries of interest are China, Vietnam, Argentina, and Colombia. And many have looked to China, but there are many more attractive emerging markets to invest in than China. Some other countries of interest are Vietnam, Argentina, and Colombia.
Emerging Opportunities
Like China, Vietnam is also in the midst of a depression-era bear market. The Ho Chi Minh stock market is the worst-performing stock market this year, down a stunning 55% in just six months. Vietnam’s economy is overheating. Auto sales are up 168% so far in 2008, inflation is running at 25%, the current-account deficit is swelling, and, as a result, the Vietnamese dong is diving versus the U.S. dollar. Foreign speculators who pumped up Vietnamese stocks to unsustainable levels just last year are now dumping shares.
Vietnam
Notwithstanding the massacre in the Ho Chi Minh stock market, Vietnam offers considerably more promise than China. Vietnam is also a source of low-end manufactured goods. Low-end manufacturing is a commodity-oriented business where the low-cost provider wins. If you are going to invest in low-end manufacturing…>
…wouldn’t the low-cost provider be a good place to start? Wages in Vietnam are less than 40% of those in China. And trade is equal to 160% of GDP, making Vietnam one of the world’s most open economies.
There is of course still a communist government in control and an uncomfortable level of corruption, but, as The Economist puts it, "At least it is an orderly sort of place, so businesses may be able to find out whom they must bribe, how much and how often, which makes it somewhat bearable if still costly." The corruption has not stopped big multinationals from investing in Vietnam, though. To name a few, Ford, Samsung, Formosa Plastics, and Intel have all announced plans to spend billions of dollars to build new manufacturing facilities in Vietnam.
The country’s policy response to the current turmoil will serve as a useful indicator to how investors will be treated in the future.
Argentina
Argentina offers great promise if the political landscape improves. The country is competitively positioned to benefit from increasing demand for agricultural products from the developing world. (Also read this article on Fertilizer Stocks by Louis Navellier.) Argentina is the world’s second-largest source of corn and fourth-largest source of soybeans. Argentina’s primary problem, as is often the case in South America, is poor economic policy.
President Cristina Kirchner and her husband, Nestor, the last president, are pushing Argentina uncomfortably close to another inflation-induced economic disaster. On the one hand, the Kirchners are stimulating the economy with fiscal and monetary measures and then, in a half-baked effort to prevent the inflationary impacts of these measures, the Kirchners are insisting on price caps, subsidies, and export taxes. Subsidies artificially support demand, and price caps and export taxes cause suppliers to curb production.
The result is more inflation, not less. But you wouldn’t know that from official inflation reports. Argentina’s official inflation rate is 9%, but the unofficial and more accurate rate is closer to 25%. A simple shift to slightly more market-oriented economic policies would be sufficient for investors to turn more positive on Argentina.
And one of the best ways to take advantage of Argentina’s potential is…>
…Cresud (CRESY). While the dreadful policies of the Kirchner government have taken their toll on the shares of Cresud, it remains a long-term play on rising agricultural land values in Argentina. I wouldn’t buy today, with the political uncertainty, but I would continue to hold if you have it in your portfolio. For more info on this and other stocks ready to profit from Argentina’s future, sign up for my Intelligence Report newsletter.
Colombia
After previous regimes’ criminal mismanagement, Colombia’s President Alvaro Uribe has crushed the FARC and gained the approval of 85% of the Colombian people. Inflation has fallen to 7.2%, and unemployment is 12%. In a nation where people were recently afraid to even walk the streets, an unemployment rate of 12% is excellent. GDP growth was 7.52% in 2007.
During the first six years of Uribe’s regime, the real compound annual growth rate (CAGR) of Colombia’s GDP has been 4.61% while, during the six years preceding him, the real CAGR was 0.67%. Those dismal years were marred by appeasing the FARC and allowing fear to spread throughout Colombia.
In November of 2006, Presidents Bush and Uribe signed the FTA to allow free trade between Colombia and the United States. That agreement is languishing in Congress. This FTA is more beneficial for the United States than it is for Colombia. Over 90% of Colombian imports already enter the U.S. duty-free, but American exports to Colombia face stiff tariffs of up to 35%. The FTA will eliminate those tariffs over a 10-year period. American farmers will be big winners, with a whole new duty-free market opening for beef, rice, cotton, and a horde of other crops.
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