Clark,
<<My god you lazy dog...lolling about in the sun, digging in your garden.>>
"Lazy" and "lolling" are antithetical to "digging" in Malaysia, trust me. <G>
It is another sultry morning here and I will soon exit to the garden again, where I sweat but enjoy my mornings. I did 6 miles on the bike yesterday, a nearby housing development with nice neighborhood roads and about 5% occupancy provides a safe place to ride. Of course you still have to dodge the material lorries (who are all driven by madmen who leer menacingly at maht sallehs). But fortunately they are few and far between since work has slowed considerably as the real estate glut in Malaysia grows. I will soon work off this recent holiday bulge infusion and hope to continue working on the surplus that was already well in place.
FEER list several reasons to feel more confident in Asia but acknowledge some continued concerns. If the concerns they list is not enough I have appended a couple of paragraphs from an earlier article I linked here that tells the best reason not to be lulled by improvements here IMO. It isn't exports folks. It is huge declines in consumption. If the next stage of recovery in Asia depends on increasing exports then the American appetite for spending has not even been truly tested yet, never mind our credit cards are strained, our warehouses bulging, and our trade imbalance grows.
Lawrence: is it possible you have your head in the sand? Hard for me to believe, let alone suggest it. But this seems very real to me. Read on:
From Next Week's FEER:
Interest-rate cuts spur stock recovery
By Henny Sender in Hong Kong
January 14, 1999
When the South Korean stock index was hovering at about 300, Alfred Ho, a director at Invesco Asia in Hong Kong, started buying Korean blue chips such as Samsung Electronics. It was early October, and the talk in the markets was rife with predictions of mass bankruptcy, civil unrest and worldwide deflation. But even with that dire backdrop, Ho thought valuations of South Korea's best shares were too low for him to resist buying.
Three months later, the South Korean market is trading at double the levels of the early autumn. From the end of September to mid-December, South Korean shares soared 80%. "South Korea isn't trading as if it is about to go bust any longer," says Ho. "It is trading like it is a going concern." Samsung Electronics is now back on the top of everybody's buy list.
It isn't the only one: Pohang Iron & Steel Co., or Posco, South Korea's world-class steel maker, had no trouble raising $300 million from investors in December. Cash-strapped banks and once-moribund securities firms have also watched their stock prices soar, sometimes quadrupling. Construction companies that haven't seen a profit in their shareholders' lifetimes are also bouncing back. Latecomers are rushing into such dubious stocks--even though they haven't rallied much--in the belief that they offer more potential for growth.
"Economies are bottoming out," declares Manu Bhaskaran, head of Asian research at SG Securities in Singapore. "True, it is off a low base, but we're out of the downward momentum now."
Bhaskaran reels off a string of encouraging statistics: the number of Thai tourists arriving in Singapore was up 10% in November; growth in car sales and department-store sales in Bangkok have turned positive in the past two months.
As markets revive across the region, analysts say it is possible that Asia has weathered the storm. Indeed, it seems that almost all of Asia is trading like it's back in business. And for the first time in 18 months, macroeconomic numbers are beginning to support stockmarkets that had been trading on hope rather than reality.
"The worst mistake in recent months was to be cashed up and defensive," says Graham Muirhead, chief investment officer for Morgan Grenfell (Asia) in Singapore. "For the past five years the surprises have all been on the downside. It may be that now, finally, the surprises will be on the upside."
In South Korea, for example, the economy shrank 6.8% year-on-year in the third-quarter--just as it did in the previous quarter. But, according to Goldman Sachs Managing Director Sun Bae Kim, if you compare quarter-to-quarter numbers, South Korea's economic performance turned positive in the third quarter for the first time in a year. Thailand doesn't report economic figures on a quarterly basis but other indicators such as production suggest that it too is off its lows. In Malaysia and Indonesia, the rate of contraction has slowed to less than 1% on an annualized basis. Among the Asian nations, only India is expected to post worse figures in 1999 than it did in 1998.
The ugliest spectres are all in retreat; the nightmares of the summer vanquished by successive interest-rate cuts in the United States and Europe. In sympathy, and also because currencies have now stabilized, the declines in Asian interest rates have been so marked that in South Korea, Thailand, Malaysia, Hong Kong and Singapore they are now at spreads to U.S.-dollar rates that are close to or even below the 1997 pre-crisis levels.
Equity portfolios as well as economic patterns are slowly beginning to resemble their pre-crisis states. Ho's portfolio, thanks to the U.S. Federal Reserve, is now full of interest-rate-sensitive shares: property companies in Hong Kong and banks in Singapore, for example.
So, is the best way to play Asia now the same way as in the past?--by buying the banks and property companies that have been proxies less for economic growth than for an asset-price inflation stoked by low real interest rates? Or should investors look for the companies that reflect Asia's ability to sell to the rest of the world? Should they buy broadly or cling, cautiously, to the tried and true?
So far, most equity-fund managers are being careful and selective; in fact many confess to being underweight in equities in their personal accounts--bond funds and convertible bonds are the favourites of fund managers who would never publicly admit to such choices. Ho says the number of stocks in his portfolios is concentrated. Many funds have less than 20 names today, half of what they may have contained in earlier times. "The number is going down and down," he says. "No new names. New names are the stuff of bull markets."
A lot of the recovery may be there but is still shaky at best. This is the year that Elisabeth Scott, who manages energy and gold funds for Schroders Investment Management in Hong Kong, thought she might see some of her gold mines and oil companies finally enjoy a bit of a run, since commodity prices are a play on economic growth. Australian resource stocks, a safe haven when the crisis first broke, have been some of the worst performers over recent months. But any hope for a recovery in commodities prices may still be premature.
For example, oil prices seem destined to stay in single digits for a while, even though Schroders oil analysts say Brent crude will be at $14.50 a barrel in late 1999. So Scott has resumed her defensive stance; putting more utility stocks in her portfolios (a play on falling interest rates), removing the more bullish bets such as oil exploration firms--and praying for a cold winter. Meanwhile, Mark Mobius at Templeton Emerging Market Funds, who has a slightly longer perspective than many of his peers, is taking a more aggressive stance on resource plays, which he believes are oversold. He says he was recently in South Africa, buying up mining shares, and is considering copper stocks in Latin America.
More worryingly, there are still plenty of potential time bombs around, including Brazil. Japan is another. In the third week of December, yields on Japanese government bonds approached nearly 2% as parliament debated supplementary budgets and massive government-spending programmes: investors began to contemplate the massive new issuance of bonds necessary to support these ambitious efforts to spend Japan out of its recession. It isn't only the supply side that suddenly seems more frightening. Talk that the government itself would no longer be the massive buyer of last resort for its own paper suddenly gave rise to a new and scary demand-side scenario as well.
Almost immediately following upon the Japanese jitters, yields in other G-7 government-bond markets rose too. "Japan is still the epicentre of global risk," says Brian Lippey, the Hong Kong-based head of merchant banker Tokai Asia. "Fundamentally, there has been little change."
The yen-dollar exchange rate remains one of the riskiest calls around. Analysts such as Jim O'Neill, chief currency economist at Goldman Sachs in London, see the yen strengthening further. That's a net good for Japan's shaky banks, but a challenge for local exporters; the one safe haven for foreign investors in the Nikkei. Given the uncertainty, many traders aren't taking big positions. "It's frustratingly political," adds Lippey. "We trade as if the yen will stay strong but we're not sure that's rational."
China can also be destabilizing for the region. Deflationary forces are still more powerful in China than anywhere else in Asia. After all, it was only in December that the country began reimposing price controls--only this time they are floors rather than ceilings. Exports and direct investment flows also weakened substantially in the second half of the year. Analysts worry that with little foreign capital coming in, the government's fiscal spending machine won't be powerful enough to generate the growth that the country desperately needs to keep people at work.
Ironically, there is more of a case to be made for a renminbi devaluation now than there was a year ago--yet fears of such a prospect have melted away. "The slowing of China's economy tops our watch list of potential problems in 1999," says Carson Cole, head of Asia corporate bond research for BT Alex Brown in Hong Kong. "The government still faces huge problems in both its banking sector and state-owned enterprises." Cole adds that a downgrade of China's debt ratings is "very possible" this year.
Some investors, such Schroders Investment Management's Hong Kong head, Richard Haw, fret that China--whether ailing or resurgent--poses a fundamental challenge for Southeast Asia. "You could argue that China's emergence in world markets took away a lot from the Asian tigers," he says. "When recovery comes, it will come more to Hong Kong, Taiwan, South Korea and China than to Southeast Asia. They have a quandary there. It will be difficult to ever see previous growth rates coming back."
Another bearish concern is the potential avalanche of supply in still-fragile Asian markets: SG Securities estimates as much as $100 billion in new shares, rights offers and government privatizations. "The expected cash-call flood has started," notes Nilesh Jasani, a strategist with SG Securities in Singapore.
Take just the first week in December: The South Korean government raised $300 million by selling a 5% stake in Posco and announced its intention to list SK Telecommunications, which could bring in $1 billion. The top five chaebols, meanwhile, announced plans to raise $15 billion through rights issues next year, while Samsung Electronics announced a rights issue that will bring in almost $400 million. Indonesia was almost as vocal; with Indosat shares on the block and several banks, including Bank Internasional Indonesia, announcing plans to issue shares as well. In Manila, Philippine National Bank issued $100 million in preference shares while the Thai government released details of a share offer by Thai Airways International.
Investors are also worried about the huge swings and volatility of recent months. "We've seen maximum bearish and we've seen maximum bullish," says Ho of Invesco. "We've seen overshooting on both sides. That suggests these markets are not efficient. They are not pricing in the right things."
Francis Wong, director at American Express Asset Management in Hong Kong, adds: "The mentality has changed in the industry. The markets have become so distorted that we don't even know what the fundamentals are any more. We all claim to be long-term investors but short-term swings are swaying all our assumptions."
Moreover, the world's central banks have soundly defeated the hedge funds and the proprietary desks of the big commercial and investment banks. But in the long term that may mean more volatility, not less, because there are fewer funds around to take the other side when markets overshoot. The short-sellers are all in retreat.
Finally, there is depressingly little evidence that any real lessons have been learned. True, the vicious circle of collapses in currencies, credit, prices and confidence has finally been broken. But how many Asian companies have really demonstrated that they can invest capital profitably? And how many investors have demonstrated that they will exercise discipline and refrain from investing in those firms that treated them so cavalierly in the past?
"Companies still have the attitude that they are doing you a favour if they talk to you," says David Brennan, chief investment officer for Barings Asset Management in London. "Their attitude is that they are lending you their shares. They aren't yet ready to treat you as if you are an owner."
One of the few markets where there are real signs of progress is Singapore, where the government is using its clout as an investor to compel firms such as Keppel to focus on shareholder value. But elsewhere it is business as usual. In Hong Kong, the red chip Shanghai Industrial Holdings attempted to inject two hotels into its listed vehicle on such adverse terms that even its newest shareholder, the Hong Kong government, was forced to question the deal.
Bull-market assumptions, in other words, continue to characterize many corporate managements. But for investors, the bear-market days are too recent to allow for such optimistic calculations.
And now from the Asiaweek article I linked previously:
<<But don't the recent market rallies show East Asia is on the way out of the abyss? "We're through the first stage," says Mark Richardson, New York-based chief executive officer for Chase Asset Management. "Confidence has come back to currencies because current accounts are looking better. But they're improving because imports have fallen off a cliff, not because exports are firing again. That is really the next stage of the Asian recovery, but it will take a little bit longer." Consider Thailand. In October, the kingdom posted a healthy trade surplus, despite a 15.8% slump in exports. The reason: a collapse in domestic demand and imports.>>
And:
<<Furthermore, how America fares in 1999 will pretty much shape the year for the rest of the world. "The threat of global recession remains," he says. "The fact that the U.S. has kept going has stabilized the situation. But what is driving the U.S. is one thing: consumption." It has grown faster than salaries or debt. "People are dipping into savings," says Richardson. "We have a precarious situation." Since those savings depend a lot on Wall Street, if stocks fall -- as many have been warning -- "the whole thing unravels.">>
To summarize, if I understand it correctly, Americans must spend even more this year (and beyond) to support a recovery for the third of the world that is in recession. Are we up to that? Lawrence, your thoughts would be most welcome.
Best,
Stitch |
