PART III - COUNTRY BY COUNTRY OUTLOOK
China - (I know there are many Chinese on this thread, please comment especially if your opinion differ)
China's foreign reserve is supposedly in the USD$140billion range. Compounded by the fact that Reminbi (chinese currency) is not liquid in the global market, it will be difficult for external forces, such as speculators, to devalue. Any devaluation, therefore, will be intentional and triggered by the Chinese government internally. The current interest rate in China is artificially high, using standard growth/inflation rate as a gauge. If needed, they can also drop the rate to stimulate the economy before having to resort to more drastic measures.
The problems facing China are massive and complex. A few of the key ones are over capacity, over supply of real estate, bad debt and Richard Gere/Tibet movies. Zhu Rongji (sp), an ex-mayor of Shanghai (?), is scheduled to take over the helm around March of this yr. During the last 4 or 5 years, he has been credited with orchestrating China's double digit growth while keep inflation in check. Though not well known to the western press and therefore the masses, I understand he is extremely charismatic. One source describes him as "having the western political and business leaders eating out of his hand". During the takeover of HK, he spoke at a standing room only luncheon in HK at about US$1000 a plate. Reportedly, there were CEOs
standing in the back to listen and no one left thinking it wasn't worth the money.
My economist friend in HK suggests that Zhu and Jiang Jiming (sp) are extremely pragmatic, unlike many of their predecessors. Zhu has recognized the problems long before the SEA crisis. Dealing with the over capacity problem, they have already curtailed a lot of the tax incentive programs designed to encourage expansion and foreign investments. Only the high tech stuff that China still lacks are targeted for expansion. The privatization of SOEs (state owned enterprises) are better managed to avoid massive unemployment. Real estate construction, especially the high price units designed for
foreigners, has been greatly reduced to deplete the existing inventory.
The bad debt issue is very murky, mainly due to a convoluted system, "co-mingling" government, work unit, investors and bank funds. I have not been able to find good reading on this subject. Reforms are on the way, modeling a new system not unlike the US Federal Reserve Banks. Management and loan decisions will be regional rather than local, hoping to eliminate the old lending policies based on who you know rather merits of the underlying security. While the estimate of bad debt sounds staggering at as much as 25%, it is quite different from the Japanese situation. Nothing really fails while many of these
loans have technically been in default for years and will most likely never be repaid.
In conclusion, my current opinion is that China will not be "the other shoe" to rock the world. The biggest danger I see from China is the expectation of such high growth opportunities that may not materialize in the immediate future.
Hong Kong - One can argue that the problem with HK, aside from being dragged dn by the other SEA countries, started with Dong Jiang Wai (sp)'s new housing policies. He wanted to release about 80K housing units for 1998 while 1997's housing supply was in the 30K to 40K range. The simple law of supply and demand immediate put pressure on HK's astronomical real estate prices which is easily US$500/sf and over US$1000 for the best stuff in the Peak District. Real estate prices have dropped about 25-30% off its highs last yr.
The Hang Seng Index, loaded with real estate stocks, compounded by the failure of Peregrine and CA, also tumbled. This in essence took a lot of pressure off the peg. Instead of devaluation the HK$, the assets have been devalued. I have heard credible argument for and against keeping the peg. At this moment, I am neutral. If, however, HK abandons the peg, this could fall into "the other shoe" category.
HK has other problems. HK's value as a conduit for China to the rest of the world is going to diminish through time, as China itself becomes more modernized. Next week is Chinese new year. HK (also China, Taiwan and other Chinese dominated countries) shuts down for 1 to 2 weeks. Not much is going to happen during this period while friends and relatives visit and wish each other a "prosperous" new year, which may be difficult to fulfill in 1998. After the new years, it is already rumored that there will be many business failures. The restaurants have been hit hard and this group may take the lead.
Many tourism related businesses will follow. Unemployment in HK may increase from the 2.5% range to around 3%. To put things in perspective, HK considered it a "crisis" (a yr or so ago?) when unemployment escalated to around 3.3%. This type of news could also fall into "the other shoe" category, especially if the timing is in conjunction with the peg or other news.
India - I have no meaningful data on this second most populous country whatsoever.
Indonesian - Big problems. This is not a good place to be right now, if you are Chinese. As the country is getting ready to celebrate lunar new yr, Suharto has declared a ban on all Chinese new yr celebrations. With the Rupiah fluctuating wildly in the 20,000 range vs the 2,000 range when I visited in 1994, life is not easy. Indonesia has a huge lower class with no safety net. Hungry people get desperate very quickly. May have to rent and watch "The year of living dangerously" again. The government is basically a military dictatorship. Any reform may have to be accomplished via some act of violence, especially since Suharto declared his intentions to run for president again. This could be big news but I can find anything that
economically ties us too significantly to this 4th most populous country in the world. If the market drops because of political
unrest in Indonesia, breakdown of IMF bailout plan etc, I have it down as a buy opp.
Japan - This no doubt is the biggie. I cannot comprehend their foot dragging strategy for so long, in regards to their banking problem. This has to be a drag on all other industries. Counting on the fact that they have to face the music sooner or later, this could be the biggest other shoe. As corporate Japan, famous for their long long term outlook, refocuses, I tell myself that it may be better to react rather than act. Who knows what will get hit? May be the US Bond market, may be PCs, laptops, consumer electronics, auto or whatever? Needless to say, it can be big time news to QCOM with ongoing 3G debates.
Malaysia - Following the example of neighbor Singapore, Malaysia had made great progress in the high tech arena. The most recent being the high tech corridor which HAD the support of every big name you can think of. I am mainly looking for clues here pertaining to growth in a few key industries such as DD. SEG and WDC can be multi-baggers if one is so lucky to time anywhere close to the bottom of this battered group.
N Korea - This is only interesting from the standpoint that it is completely isolated from the rest of the world. I read an article about a massive famine problem this winter. Any impact would likely be political rather than economical.
Philippines - This country exports labor to well-to-do SEA countries. Visiting friends in HK 15 months ago, everyone of them had one or more Philippino live in maids. Hundreds of thousands are being sent home. I have no official count but Malaysia and Thailand alone supposedly were sending about 300K home. Ramos' government is totally incapable of dealing with the problem. With no social safety blanket for the masses, my guess is that Philippines could have major political unrest and could generate a lot of CNN type headlines. Ordinarily, their role in the global economy is so small that I expect no impact. In fact, if the market reacts negatively, it should be a great buy opp. Unfortunately, QCOM just got their foot in the door
albeit a small 50,000 subscriber contract. It may delay QCOM's penetration.
S Korea - Second only to Japan, S Korea could be the other shoe. This chaebol style of corporate culture got to go, for the sake of Korea's future. Just south of the border in Mexico, the big 4 (Samsung, Daewoo, Hundai and LG) all have maquiladoras in operation. Recent SD newspaper article suggested that cutbacks are in place. Korea's growth supports many US companies, one of which is good old QCOM. If they are forced by the IMF to greatly curtail capital expenditures, it can again be a big other shoe. Furthermore, Korean university students are not shy about taking it to the streets. Great film
footage of student riots can shake the knees of the weak investors.
Singapore - Fundamentally strong and too small to create much of an impact, I don't see any earth shattering news coming from Singapore.
Taiwan - This is a strange one. For fear of retaliation from China, most SEA countries do not officially recognize Taiwan but they are more than willing to do business. Taiwan supposedly has a foreign reserve of around $80 billion (unconfirmed by any official document), a huge amount for a relatively small economy. They are in unofficial talks with Suharto's government, offering assistance. It is hard to speculate how they will react, if Korea and others launch a price war for products that Taiwan also produces. Semi and semi equipment companies are on my watch list here.
Thailand - last week, 3000 workers at a auto part factory demonstrated against cut backs (of bonuses?). By night fall, the
300 demonstrators, totally drunk by now, were baton-dispersed. Other similar incidences are expected. Bangkok has established itself as the shopping mecca of the orient for a few yrs now. Tourism has declined to a point that you can hop on a shopping junket from HK to Thailand for less than US$200 including airfare and hotel, provided you are willing to subject yourself to being "escorted" to shops shops and shops.
Vietnam - clueless. I think it has no impact.
PART IV - LOOKING FOR THE OTHER SHOE TO DROP
I have been looking and looking. Here are some ideas but would appreciate any other suggestions.
March qtr earnings should be very interesting. The bull run that we have experienced in the last few years (just my opinion)
started with the awakening of corporate America. Massive layoffs, restructuring, solving the S&L crisis etc turned the fat
cat into a lean and mean machine. This is supported by a strong business cycle with great growth rates. I find it hard to
believe that to be sustainable under the current global economic climate.
I use Zacks for earnings estimates and have not observed meaningful revisions across the board. The March qtr can be major
surprises to the dn side. This should occur late Mar and early April, during warnings season. Compounded with any or all of
the aforementioned, the street sentiments could be so grim that the world appears to be coming to an end. I am hoping for a
20-30% drop in the S&P with selected stocks just destroyed. This will be the bottom.
My fingers are tired. Appreciate counter points.
Ramsey (too tired to proof read and edit)
ps I have a lot more misc garbage if anyone wants more specifics in any area. |
