Here's a fact that may shock you: China and India represent 40% of the world's population, and just 8% of the world's economy. Moreover, the South and East Asian middle class is expected to be 2 billion strong by 2030.
That's a whole lot of growth potential. And that potential led Yiannis Mostrous, Elliott Gue, and Ivan Martchev to declare in their recent book, The Silk Road to Riches, that "the 21st century may well be known as the Asian Century."
We should probably agree
Today's investors simply cannot ignore this coming global economic sea change. And while you can profit from it without investing directly in Asian companies, we believe at our Motley Fool Global Gains international investing service that the investors who will do best in the coming decades will use bottom-up, fundamental analysis to identify the most promising small public companies these fast-growing economies have to offer.
It can be done. But before we do, let's not forget the "Asian Contagion" financial crisis of 1997.
1997: The short-short version
Money was pouring into a number of fast-growing economies -- Thailand, Singapore, South Korea. Everyone was happy because their investments kept increasing in value. But as Wikipedia notes, this was "hot money ... investors were often ignorant of the actual fundamentals or risk profiles of the respective economies."
And when tremors started shaking investor confidence, the bottom fell out.
Wash, rinse, repeat
If this sounds like a frighteningly familiar chain of events, it should. The history of the world's stock markets is littered with periods of excessive optimism, followed by periods of excessive pessimism. That's why Apple
But there's a reason they're N-shaped. As Princeton economist Burton Malkiel noted, the general trend of markets is up. That's why now is a great time to get started looking at some carefully chosen Indian and Chinese companies and prepare yourself to add money to those positions whenever current optimism subsides and inevitable volatility hits.
Find great companies
When it comes to investing internationally, the same basic rules apply: Find companies trading at prices below their true value and you'll do well. To start determining these values for our Global Gains subscribers, we assess every stock that catches our interest against the following eight-point checklist:
- Quality of earnings and cash flows.
- Business tenor.
- Growth potential.
- Competitive environment.
- Quality of company management.
- Political risk.
- Currency risk.
- Reliability of the rule of law.
A stock that grades well across all eight points isn't necessarily a sure thing, but it's a very good start.
The problems with great growth
Indian and Chinese stocks can be difficult to assess against this checklist because the countries and economies are huge and changing rapidly. Moreover, because of the incredible amounts of "hot money" that have poured into these countries in recent years, it's difficult to find stocks that are trading with any kind of margin of safety.
And whenever there's uncertainty, you need margin of safety.
We hit the road
For this reason, Global Gains advisor Bill Mann, Paul Elliott, and I spent most of June traveling in China, India, and Taiwan. We identified a number of promising companies we wanted to meet with, and we flew around the world to learn more.
It was a valuable trip. Through our meetings with Indian outsourcers such as WNS and Satyam Computer, we learned about the significant human-resources challenges facing these companies. While the opportunity in the industry is huge, there's just not enough manpower to take full advantage.
We had another interesting (and humid!) day in Macau, where we could see just how big the building frenzy wrought by Las Vegas Sands, Wynn Resorts, and others continues to be.
Asia is full of companies with wide market opportunities. They can't all be prime targets for investment dollars, but there's a lot of reward to be had by identifying the ones that are.
If you'd like to look at the stocks we're recommending at Global Gains today, including three that we met with during our trip, click here to join the service free for 30 days. There is no obligation to subscribe.
This article was first published on May 25, 2007. It has been updated.