How to Profit As the U.S. and China Battle for Southeast Asia

by Carl Delfeld, Investment U Senior Analyst
Friday, November 25, 2011: Issue #1651

I never thought I would ever say this but (three deep breaths)

Hillary Clinton has done a great job as Secretary of State, shifting American attention and resources from the Mideast to the booming Asia-Pacific region.

You can profit by following this strategic shift in U.S. diplomacy, so let’s look at some snapshots that highlight America’s re-engagement with Asia.

During the past week alone, there was some intensive Pacific Rim diplomacy.

Hosting the Asia-Pacific Economic Community (APEC) meeting in Hawaii last week and the presidential mission to Australia to deepen commercial and security ties.

President Obama’s visit to Indonesia last week to promote U.S.-Indonesian commerce and to attend the East Asian Summit in Bali. There, he met separately with the leaders of India, Indonesia, Malaysia and the Philippines. Indonesia’s Lion Air inked a deal to buy $22-billion worth of Boeing aircraft.

Launching the Trans-Pacific Partnership (TTP) – essentially a free trade agreement for the Pacific Rim including Japan.

Playing a more active role in pushing for open access and peaceful resolution to disputes in the South China Sea.

What does all this mean for you as an investor?

Pivot to Asia

First, take a look at your portfolio and see if you have enough exposure to Asia, especially beyond China and India. Perhaps you have less than you think. Merrill Lynch Bank of America recently did a review of its high net worth clients’ portfolios and found that the average allocation to emerging markets was only three percent.

Second, think about what’s the best strategy to profit from the inevitable and healthy rivalry between America and China for commercial gain in Asia?

Here’s my take. Look at the below map and you will see a thriving region south of China and east of India – Southeast Asia. This is a region often overlooked by even the most sophisticated investors and is the cockpit of rising U.S.-China commercial rivalry in Asia for a number of reasons.

These countries lie along vital sea-lanes and chokepoints, are rich in natural resources, have export-oriented fast-growing economies and politically balance their relations with both China and America as a hedge against uncertainty.

The free trade pact between the regional grouping for Southeast Asia (ASEAN) and China launched in early 2011 has supercharged trade and investment flows.

Follow U.S. Diplomacy to the heart of Southeast Asia

To counter rising Chinese influence, many of the American initiatives outlined above are aimed at strengthening commercial and security ties with Southeast Asia.

My advice is to begin with the iShares Singapore Index Fund (NYSE: EWS). The “Switzerland of Asia” plays a key role as the financial center for the region. While it’s only one-fifth the size of Rhode Island and three times the size of Washington, D.C., it’s the most strategically important global trading, finance and service nexus in Asia. Singapore is the busiest port in Asia, situated next to a vital trading chokepoint, the Straits of Malacca.

Singapore has a well-diversified economy. Seventy percent of its GDP is from finance and services but it has been able to maintain a robust manufacturing base. A promising trend is that multinational firms are moving their Asia-Pacific headquarters from China to Singapore due to its infrastructure, logistics and laws protecting intellectual property.

Exxon Mobil, Royal Dutch Shell and Sumitomo are expanding petrochemical facilities. Strong global demand for transportation, communications and logistics services, increasing information technology spending, rising consumer spending and property prices, and expanded tourism all point toward continued growth.

Next, add a dash of iShares MSCI Malaysia Index Fun (NYSE: EWM), for a country that offers investors many of the attributes of neighbor Singapore with the added benefit of natural resources and lower wage levels.

Malaysia is a constitutional monarchy a bit larger than New Mexico. Rich in natural gas and an oil exporter, it offers investors an economic environment of low inflation and debt. It’s a solidly middle-income country with a per capita income north of $10,000.

Although palm oil, tin, petroleum, copper, iron ore and other commodities are an important part of the Malaysian story, it’s well diversified with 50 percent of GDP attributed to the services sector, 40 percent to industry and 10 percent to agriculture. Malaysia’s capital, Kuala Lumpur, is also a rising regional financial center.

Finally, with U.S. interest rates at record lows and hot money pouring into fast-growing Asian markets, the investing in the Malaysian ringgit and the Singapore dollar through EWS and EWM offer investors a nice hedge on the U.S. dollar.

Singapore and Malaysia will continue to fire a region burning on all cylinders. Take a stake today.

Good investing,

Carl Delfeld

Article by Investment U