Choose the right markets

In many cases where you have a view on the economy, or the world in general, there will be different ways to position yourself in the markets.

As an example, if you were bullish about the Chinese economy because of the massive growth potential, some ways to invest would be:

• buy Chinese stocks;
• buy into shipping stocks (prices are already much higher on increased Chinese usage for shipping of imports and exports!);
• buy the yuan (the Chinese currency);
• buy commodities (raw materials), looking for Chinese demand to push up prices;
• buy into a currency that exports commodities (e.g. Australia and Canada); or
• buy stocks in foreign companies who sell products to China, for example mobile phone companies such as Nokia.

There are more. Do your homework to unravel the above example for the right answer. Above all, do not guess.

When you have a way, and there are a number of ways to implement it, look at the following 4 criteria. Choose the market:

1. Where the price has not already adjusted, or has adjusted the least, to the events you expect.

• This could rule out shipping, because shipping prices have already moved substantially higher in line with greater Chinese activity.

2. Where there is the least downside risk if you are wrong?

• If you have more reasons for being bullish on Nokia than just Chinese demand, buying Nokia stock may provide some protection if it turns out that you are wrong about the Chinese.

3. Where there is the least random influences to mess up your idea.

• The announcement of a government election in Australia, for example, would probably dominate the movement of the A$ up or down, and the Chinese economy would have little short term impact. In the event, the Canadian dollar would be better suited as a currency play on China, until after the election.

4. Where you have the best liquidity.

• This is the ability to buy and sell easily and inexpensively. Some Chinese stocks may be too illiquid.

Very often, you cannot meet all the criteria and the different criteria steer you towards different markets. It will then be a matter of judgement.

The challenge is to always think about various opportunities and the risks they involve.