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Strategies & Market Trends : JAPAN-Nikkei-Time to go back up? -- Ignore unavailable to you. Want to Upgrade?

To: borb who wrote (1166)	6/18/1998 2:16:00 AM
From: chirodoc	Read Replies (1) \| Respond to of 3902

How Low Can the Hang Seng Index Go! The Hang Seng Index has recently tested lows and the main question on your minds is "How low can it go?" We asked Royce Brennan, managing director of our Hong Kong office, for an assessment when the Index was around 7000. In many ways, this is of course an unanswerable question; however, it appears that we are finally reaching a turning period. Some anecdotal evidence: Long term money is being invested Really smart long-term money is now buying quality assets selectively in the region. Some examples of these acquisitions are in South Korea Procter & Gamble's purchase of Ssangyong Paper, Met Life Insurance Co.'s purchase of Korea Life Insurance, Volvo's purchase of the construction equipment division of Samsung Heavy, and Ford Motor's potential purchase of Kia Motors. In Thailand, another country that currently has too much debt, Ahold of the Netherlands and Tesco of Britain have both recently purchased retail chains. The press and analysts are maximum bearish The press and virtually all commentators are becoming excessively bearish and gloomy. I recently attended a most excellent presentation on the "Asian Crisis" by the investment bank ABN AMRO. The presentation, which was delivered by four of their Asian equity analysts three of whom were Asian and all were aged thirty-something, was very depressing in tone. The fact is none of these analysts have worked through a deep recession and are therefore losing all sense of objectivity and perspective. The U.S.$/Yen is the current key The key factor that is currently blamed for driving the markets down is the depreciation of the Japanese yen through US$/Yen 140. While the $/Y rate is important it is not as important as the $/DEM. Many commentators in Asia have completely missed the fact that the dollar is not appreciating against the deutschemark at all. The movement in the $/Y is essentially yen weakness. The US administration, fed-up with bailing out the Japanese has for the time being, decided not to support the yen. The long-term solution to the weakness of the yen is for the Japanese authorities to accelerate the deregulation of the economy. The yen's depreciation has caused the media to speculate that the Hong Kong dollar peg will be broken and that the Chinese may devalue the Renminbi (RMB). While there is no doubt that the yen's depreciation is making life difficult for China, we remain of the view that Premier Zhu Ronji will not devalue the RMB for at least five years. The difficulties in the region simply underline the need to maintain the RMB. Hong Kong banks Turning to Hong Kong. The yen depreciation has placed renewed pressure on the Currency Board and interest rates have risen to around 15% to 20%. In the current environment the local banks main fear is being caught short of funds and their source of funds is limited. Consequently, they are competing for funds from depositors and deposit rates are rising sharply. The Hong Kong Monetary Authority is trying to assist the banks by making more transparent the liquidity flows within the banking system thus helping them to plan their borrowing from day to day. Hong Kong property Some 30% of the Hang Seng's earnings are from property and the sector is under severe pressure with rents and property values continuing to fall. Mr. Andrew Lawrence, a property analyst at Dresdner Kleinwort Benson, estimates that prices have fallen 35% to 40% from the 1997 peak while rents have fallen 20% to 30%. Based upon affordability levels he expects a further 5% to 10% price fall. However, lack of funding, unemployment and general lack of confidence could make the market overshoot a further 20%. Obviously the increased supply will continue the downward pressure on prices. Low daily trading volume on the Hong Kong Exchange Daily trading volume on the Hong Kong Exchange has collapsed. Recently the volume has been around HK$3-5 billion with a good day being HK$6billion. Over the past few years more normal volumes have been around HK$10billion and in the recent bull market phase HK$15 - 20 billion with exceptional days of HK$25 billion. A collapse of trading volume is also symptomatic of the bottom of a bear market. Summary Based on internal earnings estimates for 1998 and 1999, we assume the Hang Seng Index should find support between 6,500 and 7,000

To: borb who wrote (1166)	6/18/1998 9:17:00 AM
From: chirodoc	Read Replies (1) \| Respond to of 3902

"It's one thing for ambitious provisions to be announced, but quite another to prevent the civil service from eroding what's in it," -- Richard Farrell, Guinness Flight <Picture> <Picture> <Picture><Picture> Fund Watch Features: The Folks with the Bucks Aren't Buying into the Japan Recovery Story By Peter Eavis Senior Writer 6/17/98 8:48 PM ET <Picture>Nice try, Bob, but it'll take more to drag us back into Japan. That, in a nutshell, is the reaction of international fund managers to today's news that Robert Rubin spent a cool $2 billion dollars to prop up the yen. "We're not considering upping our Japan exposure at all," says Rob Reiner, co-manager on the BT Investments' International Equity, which had 4.6% of its assets in Japan at the end of March. "We've seen so many false starts before." The buysiders say the Japanese stock market simply has few promising companies. Yes, there may be a brief rally on the back of currency intervention news. But unless the country's politicians come up with a swinging reform package -- and actually implement it -- then Japan will continue to disappoint. "We're not taking any precipitous action to get into Japan," says George Evans, manager of the Oppenheimer International Growth, which has a 5% weighting in the country. "We want to see exactly what's going on before we do anything." The immediate reaction to the U.S. yen-buying was optimistic. The bulls are saying that Rubin, a smart cookie, would never have agreed to intervene in currency markets unless he had extracted cast-iron commitment from the Japanese for a sweeping program of structural reforms. And such a program is likely to include big tax cuts and a bank bailout and restructuring program similar to that carried out in the U.S. by the Resolution Trust Corporation. Any inkling that these are on their way would spark an almighty rally in the Nikkei. Longer term, it would prepare the ground for a resumption of economic growth. But to seasoned international managers, things aren't that simple. First, many of the necessary reforms could be destabilizing to the equity market. Any meaningful bailout would cost at least 82 trillion yen, or a massive 17.6% of 1997 GDP, which would cause a deterioration in Japan's already shaky fiscal position. In addition, to pay for a bailout, the government will have to print currency and raise some of the money by forcing the state-owned postal bank to sell some of its government bonds. Such actions are bound to cause more yen weakness and trigger more worries of further Asian devaluations. Some are wondering exactly how many concessions Rubin actually got. Maybe, they say, the intervention was done more to prevent a devaluation of the Chinese yuan, which was looking shakier with every dip in the dollar/yen rate. "This was probably done partly to reward China for not devaluing," says Reiner. One thing is clear: Any economic revival package would have to be much larger and deeper than previous ones to boost sentiment. "It must include an enormous tax cut," says Evans, who points out that even though Japan has introduced five stimulus packages in the last year or so, its economy is still deep in the doldrums. And a banking sector reform would have to be far-reaching and ruthless, says Paul Fraker, co-manager of the 59 Wall Street Pacific Basin fund, which has 83% of its assets in Japan. A straight bailout would not work unless some banks actually go bust. This has to happen to reduce the number of banks and increase the profitability of the survivors. "Only then will banks start lending again." Plans for a wide-ranging plan may well be announced in the coming weeks. But some fear that the infamously obstructive Japanese bureaucracy may water down such a plan. "It's one thing for ambitious provisions to be announced, but quite another to prevent the civil service from eroding what's in it," remarks Richard Farrell, manager of Guinness Flight's Asia Blue Chip fund. "I'm taking a wait-and-see approach." Sweeping policies may well get fully implemented this time. But even if they are, a lasting recovery largely depends on much deeper, almost cultural, changes taking place, says Charlie Lovejoy, manager of the Legg Mason International Equity fund. As well as a shake-up of the banking sector, he wants to see more competition, freer labor markets and a better environment for small to medium-sized companies. Managers may sound deeply skeptical. But they are not pessimists. They believe that Rubin's move is a promising signal that Japan may be about to turn a corner. "This is one of the best pieces of news we've had out of Asia since the crisis began," says Farrell. And Fraker says: "If the Japanese do the right thing, the Nikkei could finish the year above 20,000" says Paul Fraker. The index closed today at 14,715.