Although the audience has grown substantially since then, I haven’t been able to determine whether investors truly comprehend the structural changes taking place around the world. It seems that this part of the equation isn’t fully understood and, therefore, the Asia investment story has a long way to run.

For the time being, the selloff continues, and the magnitude remains within expectations. I wrote the following two months ago (see Silk, 23 April 2008, The Downside):

Nevertheless, the big issue to which investors want answers is how to quantify the downside for Asian markets. Asia can drop 20 to 25 percent from current levels. This doesn’t necessarily mean that it has to drop, but if things get ugly, this is how it should play out.

Any weakness in Asia–especially of that magnitude–will offer another opportunity to buy into this strong bull market.

The Asian market has dropped around 12 percent since then, and the potential for another 10 percent on the downside isn’t out of the question. Therefore, 450 should be viewed as a well-supported level. See the chart below.

Source: Bloomberg

Timing the ultimate bottom–or top–is a game in which I don’t participate. Instead, I always recommend adding to positions or lightening up on certain holdings based on longer- and intermediate-term expectations. So we’ll buy additional shares in the coming weeks.  

One market I’ve been focusing on for some time now is Vietnam. The selloff in this market has been extremely brutal, as Vietnamese authorities and investors learn to deal with a truly emerging economy and market.

Although I’ll be discussing Vietnam’s progress in an upcoming issue, the main idea remains intact: Vietnam is transitioning to a market-based economic system that will allow for strong, sustainable growth.

The economy has encountered many speed bumps because of the persistent strength on inflation and policy mistakes. Although these issues will prove insignificant in the long run, they’ve already led to an aggressive selloff.

Although I don’t profess to have perfect insight into Vietnam’s downside, at current levels the market discounts plenty of bad news. Therefore, I’m adding Vietnam to the Silk Portfolio as my second frontier market, after Cambodia.         

I suggest gaining exposure in Vietnam through Deutsche Bank’s FTSE Vietnam Index ETF (UK: XFVT). The security trades on the London Stock Exchange and is accessible through most serious brokers. Buy FTSE Vietnam Index ETF at current prices.

Source: Bloomberg

As the second quarter comes to a close, I’ll assess our returns next week and continue making changes accordingly, reshuffling the portfolio for positioning in the second half of 2008. Until then, follow the Fresh Money Buys below for fund allocation.

Four weeks ago, I recommended shorting HSBC Holdings (NYSE: HBC). The main argument for the trade is that HSBC holds 63 percent of its loans in the US and the UK, and its stock hasn’t suffered nearly as much as the rest of the global banks.

I still expect it to be hit in a downturn, and it’s a good hedge to our long positions. If you’re in the trade, place your stop at USD93. You can also enter the trade now using the same stop/loss of USD93.

The investment process is constant. If you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Japan (banking, insurance)
• Taiwan (ETF)
• China (consumer, telecommunications, port, machinery, oil, e-commerce, coal)
• Philippines (telecommunications, real estate)
• South Korea (banking)
• Singapore (banking, telecommunications, industrial)
• Cambodia (casino/hotels)
• Vietnam (ETF)
• Macau (casino/hotels)

Special Invitation

We have a special invitation for our readers. KCI Communications, Inc., publisher of The Silk Road Investor, is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Elliott Gue, Gregg Early and Neil George.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 800-832-2330.