The unfolding events in Japan are distressing and saddening. We
all hope that the social, environmental and economic impact of the
recent earthquake will prove to be not as bad as is currently
feared. In times like this, one can become a bit squeamish talking
about investing. The sheer notion of profiting while others are
suffering is unseemly, yet you have to separate your humanitarian
side from your investment logic. So when major global events have
an effect on stocks -- positively or negatively -- a rational
course is essential.
I've been trying to look out several years to identify what major
thematic changes will take place in Asia as Japan rebuilds
itseconomy . More than likely, the country's manufacturing base
will be smaller in five or 10 years. Not only is a wide swath of
the northern part of Honshu (the main Island) facing potentially
major environmental challenges, but Japan's fiscal response to the
crisis will alter the value of itscurrency . And that will make
Japan the highest-cost country in the region -- by far.
Japan is a heavily-indebted nation. Its total government debt
exceeds even that of the United States -- as a a percentage of
. (The situation is dire in Japan because of a rapidly-aging
population due to declining fertility rates and restrictive
immigration policies.) The cost of rebuilding will likely be at
least $100 billion -- and could end up being five times that much.
The reduced economic activity also threatens to increase
already-large budget deficits as well.
To meet these costs, Japan will have no choice but to sell its
considerable amount of foreign holdings. For example, Japan owns
nearly $1 trillion of U.S. government bonds. It took that route to
keep the yen from getting too strong. Thatoption has now ended.
Before long, expect to hear about rising sales of U.S. bonds, and
as those funds are repatriated back home, expect the yen to surge
to new all-time highs against the dollar and other currencies. When
that happens, Japanese companies will have no choice but to start
moving their manufacturing base offshore more, just as the United
States has done for the past 20 years. If that scenario plays out,
Ispot a clear beneficiary: Vietnam.
Stumbling toward growth
Vietnam has been the unheralded success story of Southeast Asia
throughout much of the past two decades. Per-capita income has
risen sharply, the country's infrastructure has received heavy
investments, and foreign multinationals are increasingly setting up
shop. Companies such as
Intel (Nasdaq: INTC)
now count on Vietnam as a major part of their Asia strategy.
After a torrid growth phase, the past two years have proven far
more challenging.Inflation has bubbled up, the government is
running budget deficits due to deficient tax collections, and rigid
polices form central planners are creating bureaucratic hurdles.
The latter two issues are now being addressed and the
scare is likely to cool oncecommodity prices recede.
Make no mistake: the cost of doing business in Vietnam is quite
low. Wages are below levels seen in China (and the gap could widen
-- economists expect China's
to slowly strengthen and Vietnam's currency to weaken). That would
be of no help if it was hard to get goods to ports, but any tourist
coming back from Vietnam can tell you about the clear positive
effect of the infrastructure investments.
The pattern repeats
In the past six decades, a clear pattern has emerged in Asia. A
low-cost country trains lots of engineers and then starts to make
increasingly sophisticated products, triggering rising standards of
living. That's what happened in Japan in the 1950s through the
1980s, and then in Korea in the 1990s and 2000s. Korea picked up a
lot of business simply because Japan had become a more expensive
place to do business. Korea is now fast on its way to being a
, as are Malaysia and Indonesia. (Economists think those two
countries should be seen in the same light as the BRIC countries --
Brazil, Russia, India and China.)
As these Asian economies ripen, they start to become less
competitive in terms of basic manufacturing. That's where Vietnam
comes in. The country is now positioned to act as Japan did 40
years ago and Korea did 20 years ago. In 2010, foreign direct
investment in Vietnam rose by 140% compared with 2008, according to
the United Nations Conference on Trade and Development. Vietnam's
industrial production has risen at least 10% in four of the past
five years and is expected to rise a healthy 14.5% in 2011,
according to the
It's now increasingly likely that the impact of the earthquake in
Japan will be the shifting of more production offshore. To be sure,
several countries will benefit, but Vietnam will be a prime
beneficiary. Equally important, Vietnam's markets stalled in 2010
while neighboring stock markets rallied.
The Vietnam Fund (
exchange-traded fund (
that holds a basket of Vietnamese stocks, is just above its 52-week
low. The fund focuses on Vietnamese oil plays, construction firms,
banks and chemicals.
Action to Take -->
An interview last fall in the International Business Times summed
it up best. Doug Clayton, an executive at
of Leopard Capital noted that: "Vietnam is around four decades
behind South Korea and Taiwan and two decades behind China, but may
be on a similar trajectory because its people share that passion
for self-advancement. Vietnam also has a lot of things going for
it, which will make following the track easier now, such as having
these richer countries in its neighborhood." That's why I view
Vietnam as one of the most compelling emerging economies for the
next 10 years.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.