Watch These Potential Bull Market Killers

As we discussed last week, a major
sea change in G-7 currency policy has been announced and it
is shifting where favored assets are and what are the safest ways to play them.
The other major sea change investors should understand here is that the engine
of growth in this global recovery is Asia, not the US.

For decades, if you analyzed the US economy well, you were two-thirds
of the way there on getting the global economy correct. That is no longer the
case. Increasingly, what is happening is that the Chinese economy and Asia are
the new tail wagging the dog of the global economy. China is no longer just
a big exporter to the US consumer market, but is becoming a huge global importer
with gigantic domestic demand in its own right.

China and many Asian countries are being pushed toward effective
policy tightening via pressure to revalue their currencies, and some slight
tightening is developing in some interest rates in Asia. Single country plays
in Asia (absent perhaps India) are becoming more risky. Yet countries like Hong
Kong and Malaysia, which have pegged their currencies to the dollar all along
and have therefore been hurt competitively by a strong dollar, are now benefiting
strongly from the new weaker dollar policy. The bottom-line is that single country
plays are becoming more volatile, while full regional Asian plays are still
outperforming. Therefore we suggest investors shift from China, Thailand and
other individual country plays to broad Asia region funds like APF, SAF, or
open end versions that are doing well here, like PRASX and SASPX.

As commodities pick up, Latin American Emerging Markets start
to shine. Eventually, when commodity prices really get into gear, Latin EMs
will begin to take over leadership from Asia, since they are primarily commodity
exporters. Chile has been one of our favorite markets for some time and has
been substantially outperforming, because it is the only small and open economy
that is a major supplier to China, although Brazil and Argentina’s exports
to China are also exploding. Investors should begin a slow shift towards general
Latin region funds and iShares for broad exposure to this explosive market,
like ILF, and SLAFX. Just as emerging markets have outperformed on the upside
of recent bull move in the market, they will likely take bigger hits when a
prolonged market correction takes place.

Russia has been making mega-deals with the US to develop its
oil capacity, but here too, the Eastern European regional funds and iShares
seem to offer better risk-adjusted returns and benefits from overtight policy
in Poland and growth in the entire Eastern European region. Her, we like RNE
(Morgan Stanley Eastern Europe Fund), TREMX (T Rowe Price Emerging Europe and
Mediterranean Fund), EUROX (US Global Accolade Funds Regent Eastern European
Fund, and CEE (Central European Equity Fund).

We have been advocating resource plays for many months. Since
China is the main engine of growth, resource plays are doing particularly well,
and industrials and industrial commodity stocks are exploding. Small caps are
also substantially outperforming globally as one would expect in a phase of
accelerating growth. Small-cap Japan, for example, didn’t feel a ripple
from the currency volatility experienced in the major Japanese indexes. As we
have been suggesting all year, Emerging Markets are the place to be—