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How Chinese Economic Growth Lifts Japanese and Brazilian Markets

Playing the market and predicting the future of global economics seems to be on the top of everyone’s daily agenda. In rough times, everyone is an economist looking for the best place to store their money. As doom and gloom is all over the airwaves in the developed nations of the world, new capital and overseas investment is pouring into developing markets, particularly in the strengthening Asian markets. Investors of the developed world are catching wind of undervalued corporations and currencies whose economies are growing at a 10% rate.

As all these events unfold, China continues to grow as an economic boom – and possibly a bubble. Chinese investment soars through the roof as new funds set up shop on its shores. Investment dollars are flooding the Asian markets to take advantage of an artificially low currency and thriving businesses.

Chinese stocks had an incredible run in 2007, nearly doubling in value. China now dominates commodities and the energy sector, buying up any last BTU it can get its hands on. The places that will really benefit from China’s growth are the countries that are net importers to China: Japan and Brazil.

Former rivals turn into economic allies

Japan and China have similar economies; both are built in powerful manufacturing industries, especially in electronics and other high tech devices. Both nations benefit from the consumption from the developed consumers of the world, including the United States in Great Britain, which look overseas for more of their products than ever before.

Japan’s lack of natural resources and limited land mass has led Japan to trade extensively with China in a swap for resources. While both nations are resource poor, the advantage of trade can give both nations the required materials and economic prosperity. While Japan has been considered a developed nation for quite some time, economic uncertainty has hurt the Japanese markets. The Japanese central bank has been soft on rates in an attempt circulate more Yen and boost the Japanese market from the inside.

Japanese stocks are now on the cheap, trading at a 40% discount to the average price over the last decade. The Japanese market as a whole trades at a 15 P/E ratio, while it has averaged at 25 for the last ten years. While market forces inside Japan may look grim, the largest corporations in Japan are still thriving from a devalued Yen and overseas trading. There are eight Japanese based ETFs, but the MSCI Japan ETF (EWJ) looks best. The fund has heavy positions in large cap Japanese corporations that have a heavy exposure to foreign trade and strong sales outside Japan.

The Chinese link to South America

Brazil is the South American Saudi Arabia. Brazil’s economy thrives due to its quest for energy independence and its new found markets for oil exports. Over the last decade, Brazil has gone through a quiet revolution for clean and sustainable energy. 40% of the fuel need has been met by ethanol, a rising industry in the Brazilian sugarcane fields. With energy surplus comes the ability to sell their oil to countries that need it the most, one of which is China. China’s tremendous economic expansion has not come without the increased use of energy; China now demands more oil from Brazilian wells. Homegrown oil production brings money back to Brazil that can be spent in luxury and consumer goods, rather than production.

Investing in the Brazilian markets is made simply by the iShares MSCI Brazil Index (EWZ), the only ETF geared toward Brazil’s stock market. The ETF represents 85% of the overall Brazilian market and provides a good amount of exposure to Chinese growth. As China grows, more money flows to Brazilian oil companies and to the people of Brazil, benefiting all involved – especially the investors. Brazil looks cheap at just 16 times expected 2008 earnings, and high oil prices are likely to send the figure down – making Brazil an even better investment.

Higher energy prices are a boon to Brazil. For energy speculators, the better bet might be in Brazil rather than Japan because of the domestic oil wells located in Brazil.

Look to other international markets to boom with the Chinese. As Chinese stocks begin to look overbought, the feeding frenzy continues in other developing nations of the world. While Japan and Brazil benefit from free trade with China, the markets have yet to respond. Japanese and Brazilian markets are a great way to obtain exposure to China without paying sky-high PE ratios for your chosen companies.

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