Introduction To Asian Financial Markets

By Lisa Smith AAA

In a global economy, there are plenty of opportunities to invest outside of North America and Europe. Asia, in particular, offers a host of opportunities. Also, it is home to robust financial markets representing trillions of dollars. Any market that large is bound to offer some interesting investment opportunities. (Emerging markets like India are fast becoming engines for future growth. Find out how to get in on the ground floor. Check out The Indian Stock Market 101.)
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The regions of Asia are divided into developed and developing economies. The highly developed countries include Japan and the four countries often referred to as the Asian Tigers - Hong Kong, Singapore, South Korea and Taiwan. Major players among the other powerhouses include Russia, China, India and Malaysia. These other nations are major economic forces, but academics often debate whether or not they can be classified as "developed". Malaysia, for example, is a major source of scientific innovations, yet fails to be fully recognized as a developed nation.

Asia's Development
Historically, while the Asian markets have had stock exchanges for more than 100 years, they did not rise to prominence until after World War II. Japan set the pace with protectionist policies, and a strong central-government-led development effort that turned the country into an exporting powerhouse.

In time, its neighbors soon took notice of the trend. A host of other nations, including Hong Kong, Singapore, South Korea, Taiwan, Vietnam, Thailand, India and China, began a period of rapid industrialization in the early 1960s that continued through the 21st Century. These nations entered the global marketplace by exporting mass-produced products and then, over time, many of them evolved their efforts to enter the high-tech arena. With the injection of large amounts of foreign investment capital, the Asian Tiger economies grew substantially between the late 1980s and early- to mid-1990s.

Cross-industry growth continued until 1997 when Asia was struck with the financial crisis. The main cause of the Asian financial crisis was the collapse of the Thai baht which was ineffectively pegged to the U.S. dollar, as Thailand accumulated an excessive debt burden. Although many other regions such as China were less affected, Asia's economic growth experienced major setbacks. Since the late 1990s, these economies have recovered.

Korea is a prime example of a country that emerged from the turmoil to become a dominant player in international markets, as the country has become a technology powerhouse. With a high emphasis on education, South Korea is one of the world leaders in the robotics, biotechnology and aerospace research fields. China and India are following suite, as they work their way through the same development process. (Brazil is well positioned for future growth, and luckily for investors, it also has a very liberal investing climate. To learn more, see Investing In Brazil 101.)

Opportunity: How Investors Can Get In
The development of Asia and the cross-border flow of capital globally present a host of opportunities for investors. For investors who prefer to delegate research and trading responsibilities to professional money managers, there are numerous mutual funds and Asia-specific exchange-traded funds (ETFs) available. These funds run the gamut from regional to country specific, index trackers to sector-specific stock selectors and offer an inexpensive and easy way to benefit from diversification and professional management.

For those who prefer the do-it-yourself method, American Depository Receipts (ADRs) provided an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. ADRs are negotiable certificates issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. For example, foreign firms listed on the New York Stock Exchange as ADRs give investors the opportunity to put their money into such internationally known brands as Honda (NYSE:HMC), Hitachi (NYSE:HIT), Mitsubishi (NYSE:MTU) and Sony (NYSE:SNE).

Different than Western Developed Markets
Asian financial markets, particularly within developing economies, are still generally less mature and less regulated than markets in America or Europe. Bond markets, in particular, are often underdeveloped, as bank financing is much more common than financing via the issuance of corporate debt. On the equity side, Asian markets are less likely to do the same type of capital restructuring that is common in America, with leveraged buyouts and similar maneuvers being exceptions rather than the rule. The wide variety of financial products available through retail banks is also more common in developed countries outside Asia.

Regulatory reforms in Asian financial markets also lag Western markets, and political factors can play a role, particularly in less developed economies where government intervention can be heavy. The operating differences and regulatory differences all serve as reminders of the need for investors to conduct research and give careful consideration to any investment before adding it to their portfolios.

Asian Flavor for Your Portfolio
At the end of 2010, the Asian economies were still booming. China, South Korea, Thailand, Indonesia and Malaysia are exporting powerhouses. Gross domestic product is rising in these nations and so are the investment opportunities. Double-digit stock market returns have left Western markets in the dust over the past decade, and investors are taking notice.

Investing is Asia provide access to a significant portion of the world's stock markets in a fast-growing, exciting region. Putting a portion of your portfolio in Asia can help fill your portfolio's allocation to international investments.

For additional insight into international investing, check out Does International Investing Really Offer Diversification? and Evaluating Country Risk For International Investing.

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