(MONEY Magazine) – Investors in the U.S. have been pouring cash into China. During the first two months of this year, China-focused mutual funds took in $260 million, according to Lipper, and that was on the heels of inflows of $840 million in 2003. Not since the height of the dotcom bubble has there been such enthusiasm for a sector so risky. And that has international stock picker Rudolph-Riad Younes worried. "Some people just don't learn," he says.

It's not as if Younes, a native of Lebanon, is afraid to invest in exotic locales. Although he mostly favors global blue chips such as Vodafone and Novartis, his Julius Baer International Equity fund (which he co-manages with Richard Pell) had about 25% of its assets in emerging markets as of March. Its top holdings included Czech bank Komercni Banka and Sberbank of Russia. These unusual moves have paid off: Over the past 12 months, the fund is up 47%. For the past 10 years, the fund has returned 10.5% annualized, the second-highest return among funds in Morningstar's foreign large-cap blend category. In April, Younes sat down with MONEY's Jon Birger to discuss his market outlook.

Q. How can you be so down on China when its economy is growing at 8%?

A. I'm not bearish on the Chinese economy. I'm convinced that real estate in Shanghai will someday be the most expensive in all of Asia--including Tokyo. The question is, how do I benefit from that as a portfolio manager? A common error people make is assuming that high growth or high demand leads to high profitability. Profitability only happens when demand exceeds supply. China may have 1.3 billion consumers, but if everybody is building factories and getting government subsidies to do so, you're going to wind up with excess supply and companies going bankrupt.

Q. How is it possible to have excess supply in a nation of 1.3 billion people?

A. The problem is that barely 120 million of them qualify as middle class. And by middle class I mean families making more than $5,000 a year.

Q. So where are you investing instead?

A. Regionally, we like Central Europe, Turkey and Russia. Specifically, banks, utilities and telecom companies--sectors that will be driven by the further development of a middle class.

Q. You say you like Russia, yet you're not a fan of Russian oil stocks. Why?

A. Here's how I look at it. If I have a factory and the government starts to overtax me, I can just move my factory. But with oil, I have to be in places like Saudi Arabia or Nigeria or Russia. I don't have much choice.

Q. So you expect Russia to raise taxes on oil companies?

A. I'm not telling the Russian government what to do, but when I look at the taxation system in Norway and compare it with Russia, I see a big mismatch. In Norway the statutory tax rate on oil exports is about 70%; some Russian companies are paying effective tax rates of only 10%. As an investor, that concerns me. Why should we expect Russia to be more capitalistic than Norway?