Despite his optimism, Harris also concedes risks. "The biggest risk in
China lies in specific sectors of the economy," he says. "The
investment boom over the past few years resulted in overcapacity and
slumping margins in the steel, cement and auto sectors."
Some of his largest holdings in China include Yanzhou Coal Mining,
Petro China, Solomon Systech International and China Shipping
Development. Besides China, Harris likes South Korean and Taiwan
technology companies.
Japan also looks interesting for the first in a while. The Japanese
stock market has been performing well over the past few years after a
decade-long slump. The banking system is stronger and corporate balance
sheets have improved due to strong cash positions. Wages and employment
are rising. Plus, the country is emerging from deflation. A
strengthening yen spells good news for Japanese equities. But fiscal
policy needs to be tightened to help solve the government debt problem.
Grantham of Grantham, Mayo, Van Otteroo, favors Japan over other
industrial and developed countries, including the United States and
Europe. "I am optimistic about Japan more than any developed
country," he says. "Stocks are at least moderately cheap. There are
still political risks, but the country is doing better politically. The
debt and land overhang have passed."
David Herro, manager of the Oakmark International Fund, upped the
fund's stake in Japanese holdings to its highest level since the 1992
inception of the fund. He still is underweighted in Japan versus his
benchmark. The reason: It's hard to find shareholder-oriented
management teams in Japanese companies.
Still, Herro has been invested in several undervalued firms based on
business values and cash flow since the end of 2005. Stocks
include Kao Corp., the country's largest producer of personal care and
cleaning products; Rohm Co. Ltd., which makes a wide range of
semiconductors; Unicharm Corp., which makes disposable diapers,
feminine hygiene and adult products; Honda Corp., one of the world's
leading car manufacturer; and NTT DoCoMo Inc., a mobile phone carrier
with more than 50 million subscribers.
Although Asia and the Far East look good, the European markets could
underperform, says Edward Yardeni, chief investment strategist with Oak
Associates, Akron, Ohio. His reasons are quite contrarian: The U.S.
dollar should rise against the Euro due to high unemployment and
deficits in Europe. He recommends that investors reduce holdings in
European stocks and stocks of U.S. multinational companies with a
strong presence in continental Europe.
Grantham disagrees. German companies, he says, could be solid
investments. The country has low inflation, its exports are on the rise
and it is conservative.
Nicholas Kaiser, manager of the Sextant International Fund, says
investors should not overlook Canada, Latin America and South America.
Plus, he's been accumulating shares in multinational European companies
with price-to-earnings multiples that are less then earnings growth
rates of about 20%.
"We are value investors going with cyclicals, mining and commodities
with favorable future earnings," he says. "Canada is our biggest
country exposure because of the natural resources and mining companies.
We see oil prices and commodity prices holding up."