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Stock-Markets / Global Stock Markets Oct 12, 2007 - 06:31 AM GMT

By: Yiannis_G_Mostrous

Stock-Markets

Best Financial Markets Analysis ArticleThe bull continues to charge ahead. I still expect some kind of correction at some point this month because it would be uncharacteristic for the markets to continue going up with no interruptions.

The main risk remains the shaky situation in the credit world. Consequently, the slowdown of the US economy could turn into a recession that would be very bad for the global economy. At this time, the probability for a recession by the end of the year or the first quarter of 2008 is around 50 percent.


It isn't difficult to identify economic excesses in advance. Being able to specify the tipping point is the problem. And it's one that the perma-bears haven't been able to solve either. They've been giving the wrong advice for two years now.

But if the global economy is able to help the US avoid a recession and adjust to its problems gradually--as it's done for the past 12 months--then everyone will do just fine. Bottom line: The potential outweighs the dangers, slightly.

Look at Japan

Japan has to be the least interesting market in the world right now. Nobody I've spoken to is interested in investing there, based on the perception that, because there are so many opportunities elsewhere, money allocated to Japan is dead money.

There are better opportunities right now than Japan, which is why I've ranked the country quite low as a fresh money buy for some time.

On the other hand, the negative sentiment surrounding the market offers an opportunity for long-term investors to pick some undervalued stocks, if only from a contrarian point of view. And no, I don't think you'll be walking into a “value trap.”

Big banks, in particular, have been the dogs of the Japanese market for a while now. They're down substantially from their June highs and now trade at favorable valuations. 

Recent credit woes have also added to the already negative sentiment, even though Japanese banks have relatively little exposure to overseas subprime mortgage problems and little risk in nonperforming domestic loans. Last time I checked, Japan isn't in the midst of a financial crisis.

Japan is enjoying a secular bull market that commenced in 2003. As I've noted on numerous occasions, I expect growth to continue as the Japanese economy gradually moves out of deflation while consumers return in strength, thus allowing Japanese firms more pricing power.

Recent developments on the monetary front do, however, bear watching. The decision by the Bank of Japan (BoJ) to leave rates unchanged gave an indication to the market that BoJ members want to see more evidence on price inflation. It remains to be seen if Japanese authorities will be able to effectively navigate the economy back to normality (i.e., out of the deflation trap) and allow it to flourish once again. 

Bears and Asia

The bearish argument regarding the current economic situation 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. 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 great ride--at least until now.

Asian markets strength was also the main reason they sold off violently during the summer selloff. 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.

A lot of funds have also been moving to the so-called safe haven of the US market. Although there are reasons--basically valuation-related--for such a move, it doesn't make a lot of sense to me. It is, after all, the US economy and its securitization industry that's the source 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 put your money to work in the “high risk” markets of the East, 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 a fortunate catharsis for the region. The main reason I like the long-term Asian investment theme is the economic reform, moves toward privatization and the commitment to free trade that emerged from the crisis and has since defined Asian governments and the region's economic establishment.

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. Diversify your portfolios and have exposure to Asia. 

 

By Yiannis G. Mostrous
Editor: Silk Road Investor, Growth Engines
http://www.growthengines.com

Yiannis G. Mostrous is an associate editor of Personal Finance . He's editor of The Silk Road Investor , a financial advisory devoted to explaining the most profitable facets of emerging global economies, and Growth Engines , a free e-zine that provides regular updates on global markets. He's also an author of The Silk Road To Riches: How You Can Profit By Investing In Asia's Newfound Prosperity .

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