Asia Analysts Reach For Their Red Pens
Anne Hyland Hong Kong
10/01/2001
Australian Financial Review Page 23
Copyright of John Fairmfax Group Pty Ltd
Corporate earnings across Asia are about to be severely thumped.
Strategists and analysts are preparing to take their red pens to company-profit predictions following a slew of recent downgrades for economic growth forecasts across the Asia region.
Morgan Stanley has cut its economic growth estimate for Asia to 3.3 per cent from 4 per cent for 2001, and ABN Amro said Hong Kong and Malaysia would be in recession for the year, joining Taiwan and Singapore.
``The earnings are being pushed down by economic downgrades across the region, it's as simple as that,'' said Mr Chris Wood, regional strategist at ABN Amro.
A significant tightening in companies' capital expenditure budgets on investing in equipment and machinery across the region, particularly in Taiwan's electronics sector, and staff lay-offs have underlined the pressure on corporate earnings.
In Hong Kong, investment banks have led the charge in sacking staff, ING Barings being the latest to hand out pink slips. The territory's second English-language newspaper, Hong Kong iMail, sacked 100 of its 140 staff, and the Hewlett Packard-Compaq merger is causing upheaval across Asia as the job losses are estimated in the thousands.
Mr Dio Wong, strategist at Merrill Lynch, said forecasts for company 2001 earnings across Asia would see Taiwan as the most affected market.
Merrill Lynch is forecasting a 50 per cent decline in average company earnings per share in Taiwan, mainly because the out-of-favour electronics sector is responsible for most of Taiwan's exports, which make up 50 per cent of the country's gross domestic product.
However, if the country's two largest semiconductor manufacturers TSMC and UMC are removed from that, then the decline in EPS for Taiwan falls to 18 per cent.
Merrill Lynch also expects Korean companies' EPS to be flat, Singapore to be down 25 per cent, Indonesia to be down 7 per cent, Malaysia to be down 11 per cent, Hong Kong to be down 5 per cent, and Australia to be up 8 per cent.
But it may be that this round of earnings downgrades is nowhere near the bottom.
The concern about the likelihood of a United States-led attack on Afghanistan, how long it would drag on and the effect it could have in pushing up oil prices, made it clear that a lot of the earnings forecasts were ``no better than guesswork'', said Mr Han Ong, strategist at Salomon Smith Barney.
Mr Wong said: ``The key thing going forward is whether we have a recovery in the first quarter of next year or at the end of the second quarter. If it is indeed pushed out, then typically we will see a raft of revisions to follow the market down.''
As for 2002, he said EPS forecasts at present were for a significant recovery in profits, clawing back almost all of their declines in most Asian markets on the back of a rebound expected in the US economy. As an example he said Korea's 2002 average EPS was set to rise by 69 per cent.
Mr Wong said investors looking for protection from the earnings carnage could look to the financial sector. He said lower credit growth for the industry had already been factored in.
Telecommunications stocks were also attractive, but he cautioned that there could be some provisioning surprises if investment values declined. Mr Wong said SingTel's stakes in India and Thailand telecom companies were examples of investment values that could be reviewed as well as Telstra's ventures in Asia with Pacific Century CyberWorks .
ABN's Mr Wood said they were also advising clients to remain overweight telecoms in the region to limit their earnings risk. He said financial stocks were also attractive while investors should be underweight technology.
``Asian telcos are not leveraged like they are in the US or Europe,'' Mr Wood said. ``They are a domestic demand story, while technology stocks are very much geared to the external markets. For Asian banks they have not geared up much since the last Asian crisis and by that virtue their exposure is domestic.''
He said HSBC was the exception because it is an international bank with exposure to global capital markets.
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