Decoupling at Last

08/20/2009 12:09 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Talk about your new world order! On Monday, the fate of the global economy seemed to rest in the sweaty palms of the day traders in Shanghai, who were hurrying to cash out the extravagant gains chalked up earlier in the year. The government's refusal to let them invest abroad made China's expensive stocks the envy of the world and, soon enough, the planet's bane.

After another rout Wednesday, the Shanghai Composite has tumbled 20% in two weeks. And though it's still up a glitzy 53% so far this year, the rate of the decline threatened a drop below breakeven by next week. The slowdown in heretofore feverish bank lending and the return of initial public offerings convinced sellers that the top is in.

Wall Street was forced to wrestle with the notion that China's growth and its voracious appetite for commodities might prove as volatile as its stock prices. But by midweek, that theory had been given a pauper's burial. New York seemed more focused on the prospect of buying into rebounding US profits poised to get another lift from an economic recovery, no matter how tepid. China bulls' cherished dream had finally come true: Their favorite market has indeed decoupled.

Of course, Beijing bureaucrats could engineer another rally any time they wish—and no one's going to accuse them of treading the treacherous path toward socialism. At least not while they're trying so hard to privatize and rationalize state-owned steel mills over the violent objections of the proletariat.

Meanwhile, China's sovereign wealth fund could put as much as $2 billion of its surplus dollars to work investing in distressed US mortgages on the favorable terms offered by Uncle Sam. Asian money remains in demand in the cash-strapped West. When a Steven Spielberg seeks to break free of Hollywood entanglements these days, he goes hat in hand to Bollywood, relying on a $325-million investment from India's Reliance Group to set him up. European banks passed, having had all the entertainment they can stomach.

In fact, some banks are dreaming of their own paydays in the East, with HSBC (NYSE: HBC) among those considering public share offerings in Shanghai, as Daniel Harrison writes in this week's Global Perspectives. They might be a tad late to the party, but selling shares to Chinese speculators at even a modest premium would sure beat selling marked-down loans to the Chinese government.

Who isn't hard up these days? Top Templeton fund manager Cindy L. Sweeting says many big multinationals are generating lots of cash, are leveraged to the global recovery and yet trade at a discount to the smaller fry that have led the rally off March lows. Two of her top holdings are Taiwan Semiconductor Manufacturing (NYSE: TSM; TAIWAN: 2330) and Samsung Electronics (Seoul: 005930)—and perhaps not coincidentally, the same Asian techs have lifted the fortunes of a closed-end fund that has soundly thrashed most competitors focused on the Pacific Rim. As Carla Pasternak writes, The Asia Tigers Fund (NYSE: GRR) has proven its mettle over time. And the dividends it harvests suggests the Asian tigers aren't done.

Not that one needs to head to Asia to reap fat yields. National Grid (NYSE: NGG; LSE: NG) squeezes a juicy 7.4% from the well-insulated business of distributing natural gas in the UK and electricity there and along the US East Coast. Josh Peters and Travis Miller of Morningstar like that one quite a bit. And Shanghai shenanigans can't damp its profits.   

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