'OUT OF THE WOODS YET? NO'
That's Asia. As for the rest of the world . . .
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Stocks & Bonds
LATE LAST YEAR BARTON BIGGS announced that he was reducing the number of Hong Kong shares in his portfolio. This from the same investment guru who lifted Hong Kong shares in 1993 when he declared himself "maximum bullish" on China. Chief global equities strategist for Morgan Stanley Dean Witter, Biggs also is chairman of Morgan Stanley Asset Management Co., which manages a vast array of funds worldwide. He has long predicted a major correction in the U.S. stock market, recently claiming on an American television broadcast that stocks were poised to "plunge into the abyss." Biggs spoke with Asiaweek contributor Louise Nameth about the U.S., Asia and the rest of the globe:
Is the U.S. stock market headed for a crash or just a series of deep corrections?
It could be that we're in a cyclical bear market where we would expect a decline of 20%-30%. If that's so, we're two thirds of the way through it. If it is the kind of bear market which only comes once every 20 years, then we would expect the market to go down more than 40%. It depends on how things develop and on how the central bankers and others in authority react.
How would you like to see these authorities react?
I don't think it's easy to come up with a single answer. Only time and the river will get us out of the problem of excessive leverage and overcapacity around the world. I think it's intriguing to listen to Alan Greenspan, Robert Rubin and everybody from Prime Minister Tony Blair to the head of the International Monetary Fund. They are all saying that the authorities - with a Capital A - are trying to come up with a new global financial architecture, a new Bretton Woods. It's nice to think that that will solve all the problems.
Are lower interest rates the answer?
No, there has to be a new architecture. Lower interest rates will certainly help, but we've seen that when you're in a liquidity trap, lower interest rates only cause money to flow into bonds rather than stocks or into the real economy.
Despite Greenspan's opinion that world leaders will not cut interest rates, do you think that certain countries will be forced to do so anyway?
I think interest rates are going to come down around the world, eventually even in Europe. The world economy is slowing; we're on the brink of a global recession in l999. Strong currencies are an anathema to these countries and it may well be that we're looking at competitive devaluations.
Do you expect more hedge-fund bailouts, along the lines of the recent rescue of the Long Term Capital Management Co. in the U.S.?
I think there's got to be some other entities out there that are in very serious condition. It will be of a scale and scope that none of us can imagine.
Do you think President Bill Clinton's troubles will have an impact on the financial markets?
I don't think that Clinton's troubles are any longer such a big factor. The markets probably would just as soon that he was not impeached and that he stayed in office and served out his term.
Do you expect a devaluation in Brazil, and if so, when?
Brazil does not deserve to be dragged down by the contagion. After all, they've done a miraculous job on inflation. They've brought it down from four digits only a few years ago to virtually no inflation today. But Brazil has not dealt with its fiscal deficit the way it should have. It's going to be crucial whether the authorities can hold the line and give Brazil the money they need to tide them over this thing. But I don't know whether they can or not. I don't know whether there's enough money in the world to do it. So much of it depends on confidence. It's the local money coming out of Brazil that's putting pressure on the currency.
Some say that if Brazil devalues, Argentina is likely to follow.
I definitely agree. If Brazil goes, so goes South America.
Are you at all confident about the IMF bailout of Russia?
I'm not confident about anything in Russia. Russia seems to be drifting into chaos. I would like to think that some sort of new world order would be able to get capital flowing back into the country. I'm afraid that Humpty Dumpty has fallen off the wall there, and all the king's horses and all the king's men can't put it back together again.
What is your prognosis on banking reform in Japan?
It seems like banking reform just goes on and on, and nothing happens. So, it's discouraging. We think that Japan will stay in recession for another six to nine months. After that, a slow recovery will begin. I don't think that's a very encouraging scenario for Asia. Japan has got to wipe out equity shareholders in the bad banks and auction off the assets. They talk about it a lot, but they really have to bite the bullet and get that behind them. Japan must also repeal the consumption tax it added in April 1997 and stimulate its economy. Finally, I think the Japanese have got to start talking down instead of talking up the yen. Japan needs a weak currency, a reformed banking system and much lower tax rates.
Which sectors do you expect to recover first? Are there currently any bright spots?
I tend to feel that Japanese domestic stocks are the most attractive, including the group of export-oriented companies that have done so well, and are priced to world standards. The value in Japan is in the domestic companies with small and medium capitalizations.
What about the yen?
It's inevitable that the yen is going to weaken a great deal in the months and years to come. As we monitor them, the capital flows out of Japan are still very, very large, and it convinces me that the yen has got to weaken. I expect it to head to l50-160 over the next three months.
Do you want to comment on any particularly favorable sectors in Hong Kong?
I think Hong Kong is beginning to get interesting. The real estate stocks, as our analysts computed them, are selling at substantial discounts to their net-asset value (NAV). That would be down 75% from the highs in office properties, 40% or 50% in commercial properties. The prices haven't fallen that far, but that's a pretty dire scenario. Some of the real estate stocks are selling at some pretty substantial discounts even to those dire scenario NAVs. That sounds like value to me. The large blue chip companies like Swire and Wharf look good too.
What about China?
The red chips as a class are attractive. I think that China is going to be the emerging market of the first decade of the twenty-first century. China has managed its whole adjustment to the new world better than anyone else in Asia by far. Does China still have problems with its banking system and its state-owned enterprises? Absolutely. Are they dealing with them in a logical and orderly and enlightened way? I think they are. China is going to be the place to be.
Any specific examples of how you approve of their reforms?
They have recognized the problem of the state-owned enterprises and the banks, and they're making the reforms that are needed even though they are painful and involve huge layoffs. They're doing it in an orderly way, although in this time of stress, when the economy is falling, they are not pushing it as hard as they were a year ago. Premier Zhu Rongji is a really intelligent and rational economic steward, and they're moving in the right direction. The Chinese have lots of problems, but they're approaching them in a rational way whereas I don't think some of these other countries, like Malaysia, necessarily are.
What do you make of the dismissal of Anwar Ibrahim in Malaysia?
It indicates that there is going to be more political change in Asia.
What do you like in Singapore?
I think Singapore is another market that's beginning to get interesting. Singapore's got lots of problems with real estate and with its neighbors, Indonesia and Malaysia. But we can find a lot of cheap stocks and companies that are selling at substantial discounts. The banking sector also looks very strong to me. When you can find some of the best banks at 30% to 40% discount to book, that's pretty cheap. So, is Singapore going to grow the way it has in the past? No, but I tend to think that there is going to be 5% real growth in the economy over the next five years. Singapore is going to challenge Hong Kong as the financial center of Asia. We have some money in Singapore, and we're partially hedged, but we don't feel very worried about it.
Any other bright spots in Asia?
Thailand has made some progress. They've proceeded with banking and real estate reform as efficiently as any country in Asia. They were the first to look into the abyss and it appears to me like they've made a pretty reasonable adjustment. So, they might be the first out. None of the Asian countries is out of the woods yet, but the trees are starting to be less thick.
Any parting shots?
I'm concerned that the U.S. and Europe are now starting to slow and that a credit crunch is developing in the U.S. We could be on the brink of, at best, a global slowdown and at worst, a global recession where real growth declines in the world by, say, a half of one percent.
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