East Asia's Sudden Slide

When the bell rang on Dec. 30, ending 1993's last day of trading on the booming Hong Kong Stock Exchange, the number 11,888 flashed from the tote board displaying the Hang Seng index. The number eight signifies wealth in Cantonese, so the closing price should have been an auspicious omen for 1994. But in Hong Kong and across much of East Asia, investors have had anything but good fortune since the new year dawned.

After a rocket-fueled 1993 that saw some bourses double in value, 1994 is off to a bumpy start. Since New Year's Day, the Hang Seng has lost 10%, Bangkok's Stock Exchange of Thailand index is off 11.6%, and Kuala Lumpur's composite index is down 16.4% (table). U.S.-listed country funds are also in a tailspin. Since Dec. 31, Malaysia Fund and Thai Fund are each down 19%, Singapore Fund has dropped 17%, Taiwan Fund has lost 14%, and China Fund has dropped 21%. Some experts expect even more declines. Nicholas Knight, Nomura Securities Co.'s influential London-based strategist, is one of them. After the Hang Seng hit a record 12,221 on Jan. 4, Knight shook the region's bourses a day later by advising clients to stock up on Japanese equities and retrench in Hong Kong, Malaysia, and the Philippines. Says Peter Soo, director of fund management for AIG Investment Corp. (Asia): "Stock markets in Asia have been

way overheated. We are seeing a long-overdue correction."

But this may be only a temporary downturn, and the markets may soon bounce back. After all, Asia remains the world's "growth engine," says Baring Securities Ltd. Hong Kong analyst Nigel Chan. Even if a rise in short-term U.S. interest rates pushes Asian rates higher, earnings prospects remain bright across the region, with profits expected to be up 20% in Hong Kong and 25% in Indonesia this year. Asian price-earnings ratios are hardly mut of line with the U.S. average of 23, and Hong Kong and China are far below.

BARGAINS. Indeed, many Asian money mavens say their region still offers high-quality issues with solid growth prospects. So much so that AIG's Soo, who manages the open-ended Van Eck Asia Dynasty Fund, found the Hang Seng's drop the perfect reason to become "a very big buyer" of blue chips. With an average price-earnings ratio of 15 for the Hong Kong market, "we still find a lot of value out here," agrees William R. Ebsworth, managing director of Fidelity Investments Management (H.K.) Ltd. "The market may be down, but when you go out and visit companies, they look very good."

Ebsworth counsels sticking to blue chips as the safest way to weather a stormy period. "We want a great balance sheet, great management, great earnings growth. That way, if you get a 700-point drop in the market, at least you're not embarrassed." Chief among Ebsworth's recommendations are Hong Kong's big commercial-property companies. Noting the full occupancy rates of some developers' prime office buildings and hotels, Ebsworth and other analysts favor Hong Kong Land, Wharf Holdings, and Sun Hung Kai Properties. Meanwhile, Kara Tan Bhala, portfolio manager of Merrill Lynch Dragon Fund (box), is moving into HSBC Holdings, the owner of the global Hongkong & Shanghai Bank empire. And AIG's Soo likes Luks Industrial, a maker of color televisions with rising sales in mainland China that's trading at a mere eight times 1993 earnings.

Hong Kong is hardly the only Asian market that's still worth a look. Don't forget Bangkok. That market's recent drop may actually have pleased government finance officials, who had been fretting that massive foreign investment was hyperinflating stock prices and putting upward pressure on the Thai baht. Malaysian officials have made similar noises. That's why Mark Greenwood, an analyst at Bangkok's First Asia Securities Ltd., thinks the recent declines across the region represent "pricking a miniballoon before it becomes a major balloon." He and others think it's just one more reason to buy blue chips.

Nomura's Bangkok-based research chief, Pakpoom Vallisuta, thinks infrastructure projects will continue to buoy the fortunes of land developer MDX Ltd. Big lenders, including Bangkok Bank, Thai Farmers Bank, and Siam Commercial Bank, could also benefit from the construction boom. But some stock-pickers prefer Malaysia, where investors are counting on stocks to recover as government spending rises in advance of an expected national election. John R. Hickling, manager of Fidelity Overseas Fund, favors Telekom Malaysia, which, at $7 per share, is 20% off of its recent high.

FOREIGN FLIGHT. For all of the construction projects under way, however, it still may be developments in China that call the tune of Asia's markets. With inflation topping 20% in urban areas, Vice-Premier Zhu Rongji is trying to get the economy under control through currency devaluation, bank reforms, and new taxes. And though he risks sparking labor unrest, some economists think Zhu will also be forced to reimpose the credit squeeze he recently eased. Amid such concerns, Andrew Hunt, chief economist of Hong Kong's Thornton Asset Management, thinks China's economic growth rate could fall as low as 4% by the fourth quarter, from 13% in 1993.

Such a steep drop could further unsettle Hong Kong. But in a world where many industrial economies are struggling to achieve 2% growth rates, even a 5% expansion is nothing to sneeze at. Indeed, many Asian nations expect 1994 to bring considerably higher growth. Merrill Lynch & Co. estimates that Indonesia's gross domestic product will surge 7.8% this year on top of 7% in 1993. Thailand could grow even faster.

If those predictions hold true, "I'm sure the foreign money will come back," says Nomura strategist Vallisuta. Perhaps not with the enthusiasm of '93. But few analysts think global investors can afford to ignore Asia for long.

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