From this week's AsiaWeek: Rally or Recovery?
Don't get too excited about resurgent stocks -- Morgan Stanley's top
global strategist sees corrections ahead
BARTON BIGGS IS SMARTER than the average bear. Few investment gurus can match his track record for
predicting the ups and downs of Asian stocks. Biggs, Morgan Stanley Asset Management's chief global strategist, got it
right in 1993. After a tour of Hong Kong and China, he declared himself to be "maximum bullish" on the region --
presaging a record-breaking run in Asian bourses. Amid the stock swoon last fall, Biggs again was ahead of the curve
when he warned of the wrenching economic debacle ahead. As recently as mid-January, when Asian currencies and
stock markets were at record lows and appeared to be headed even lower, Biggs took another look and pronounced the
selling mania an overreaction -- markets were prime for bottom-fishing, he said. Sure enough, in recent weeks investors
returned and equities rebounded sharply, although values remain well below levels reached last summer. Biggs, whose
firm manages $150 billion in assets, says bargains abound in Asia. But he is not optimistic overall. He told Asiaweek's
Assif Shameen he believes that bear markets prevail not only in Asia, but also in the U.S. and Europe.
Is the worst over for Asian equities?
I think the second week in January was the first bottom of the Asian bear market. What we saw was a true selling-climax
panic. I have never seen such a frenzy. It is possible that those lows will be tested again sometime this year -- perhaps
three to six months from now -- if other markets around the world run into serious trouble. But clearly the worst stock
market problems in Asia are over, although the worst economic problems are still ahead. Markets have more or less
discounted the bad corporate earnings numbers that will come out this year. All of that is factored into share prices.
Will the bad news to come -- the corporate bankruptcies, unemployment, social strife -- hold stocks in check?
Look, economic news from here on doesn't have to be good for these markets to recover strongly. It just has to be less
bad than what has already been discounted. Huge amounts of bad news were discounted when some Asian markets
were down 90% in U.S. dollar terms. That is as bad as it ever gets in equity markets.
Is Asia now a bargain-hunter's paradise?
I think so. I believe on a risk-reward basis there is no place else on earth where you have the kind of upside potential that
you have in Asian equities today. The riskiest situation is in Indonesia. But it also has the cheapest stocks in the world and
there are a few stocks there that probably have the best potential for upside in the world. The safest bet is without a
doubt Singapore. But other markets, such as Malaysia, Thailand, and the Philippines, are looking attractive too.
Are Asian markets in the first phase of the next bull run?
No. We are in a rally. In the past three or four weeks, some of the Asian markets such as Malaysia and Singapore have
already gone up 50% in U.S. dollar terms. Most of the Asian markets are already more than half or even two-thirds of
the way through the rally. But what we are seeing is a bear-market rally. It is not like 1993. It is not the beginning of the
next bull run.
Have Asian currencies hit bottom too?
Currencies were clearly oversold during the frenzy. It has been my view that we are now in a "sweet spot" in the world
markets. With increasing confidence globally, the currency contagion in Asia has been contained. I also believe that
Chinese officials are serious when they say they will preserve the Hong Kong dollar peg and will not devalue the renminbi.
I think the yen will appreciate towards 120 to a dollar in coming weeks, and Korea will not default on any of its foreign
debts. All that is good news for Asian currencies.
What will derail the current rebound in the equities markets?
The sweet spot I talked about is really just a respite from the global bear market that began in August. In the first phase,
Asia was hit while the U.S. and Europe had roughly 10% corrections. There is still another shoe to fall in the months to
come. But the force of that fall will impact mainly the U.S. and Europe.
How do you view the U.S. market, which remains close to its peak?
We are entering a period where there is very little inflation, while real incomes in the U.S. are still rising. That means the
economy is accelerating. This won't last indefinitely. Eventually, expected earnings are going to fail to materialize. There
will be effects from Asia, whether in the form of a credit crunch or earnings disappointments. With market valuations as
high as they are, there is a risk of a sharp correction. Markets on the way up must keep getting news that is even better
than what is already reflected in the stock price. When the news does not get better, you get a correction.
In 1993 you first began talking about the Asian growth story and the Asian bull market. What went wrong in
1997?
Five years ago Asia was in a different environment. Looking back, I think I fell for the "Asian Way" story. I failed to
recognize how dangerous fixed-exchange rates and offshore borrowing facilities were. And I failed to recognize that they
were going to lead to a tremendous overbuilding of capacity all across the region.
You have been critical of corporate governance and cozy relationships between government leaders and their
cronies. How much of this is an obstacle to economic recovery?
Questionable corporate governance, lack of transparency, lack of disclosure, cozy relationships between businessmen
and politicians and rules favoring domestic investors -- these are facts of life in emerging markets the world over. If Asian
governments are serious about encouraging foreign investors, one of the most important things they can do is improve
transparency.
Should a country's political situation figure heavily in investment decisions?
Politics is one of many important factors. Political uncertainty in countries such as Indonesia raises the risk premium. That
is another reason to like more stable markets such as Singapore.
Indonesia is considering instituting a currency board system. Is that a way for Asian countries to stabilize their
money?
Establishing a currency board is a dangerous game. When they do so, countries give up fiscal flexibility. Without a central
bank, you are unable to control your own monetary policy. However, for those in desperate straits, it may be the right
thing to do. It was the right thing for Hong Kong in 1984 and for Argentina in 1994. Maybe it is the right thing now for
Indonesia. But it certainly is not the right thing for all of Asia. Malaysia or the Philippines should not copy the currency
board system.
The Asian crisis has hurt stocks in other emerging markets. Why?
First, investors have been looking at the things these markets have in common rather than their differences. There was a
lot of speculating going on in some emerging markets. Part of that speculation was money pouring in from other emerging
markets. Second, there is the matter of confidence. After getting their fingers burned in Asia, investors ran for cover. They
were trying to minimize losses in Russia and Latin America.
Japan is still trying to claw its way out of its economic slump. What are the prospects for success?
Japan's problems in recent years have worn everybody out. The way I look at it is, the Japanese are stubborn, but not
suicidal. They will come out soon with a fiscal package that will be better than expectations. I think the market will rally
up to the 20,000 level for the Nikkei, and the yen will rally up to 120 to the greenback. But as in all things concerning the
Japanese government, until things actually come through, it is easy to be nervous.
How about Korea? Are they on the road to recovery?
Korea appears to be on the right track, and their stock market was the first to begin to recover. In dollar terms, the
market is up 45%-50% from its lows in December. But the country still has huge foreign debts and Korean companies
have very high domestic debts. I am only moderately enthusiastic about Korea at this point.
India and China have been spared much of the region's economic turmoil. Over the next two years, how will they
fare?
China knows -- the whole world knows -- that if they devalue the renminbi, a whole new round of devaluations would be
set off across Asia. That could bring down most emerging markets and maybe even the developed markets. I think
Chinese government officials deserve full credit. But we have to wait and see whether they can also withstand the
economic pain to come. China's manufacturing competitiveness will suffer. They stand to lose out to other countries in
export markets around the world as well as within the region. I just hope government officials can withstand the pressure
and stay the course.
Over the next six months or so, I think India looks a bit shaky. The rupee is overvalued; their central bank is supporting it
at a level that is too high. The consequences are high interest rates, and a weak economy. With the overcapacity that
exists in a lot of industries, I am worried India could be a difficult market, at least in the short run. |
