Asian Markets: Golden Moment or Sucker's Rally?

They're reviving, but economies are still ailing

It's the yin and the yang of the markets. Last year, Asian economies were in their best shape since the 1997 currency crisis, but stocks were in the deep freeze. Today, Asian economies are feeling the effects of the U.S. slowdown. Yet with the exceptions of Japan and Hong Kong, Asian markets are among the world's few gainers. Is this a sucker's rally, or are happy days here again?

In part, Asian stocks are up because share prices got so cheap that investors couldn't resist. Buyers beware: The current bounce aside, Asian markets are volatile and still vulnerable to the U.S. downturn. After last year's huge sell-off, however, there are real bargains. Good Thai companies, such as tuna canner Thai Union Frozen Products and National Petrochemicals Corp., sell at two to five times earnings.

Besides, it wasn't just the Nasdaq plunge that dragged Asian stocks down last year. Each country has pervasive problems--political strife, recession, and unreconstructed, debt-laden companies. Some markets are coming back as these concerns ease. If the U.S. downturn is moderate, "the stock markets should have reason to celebrate," says David Cohen, senior economist at S&P MMS International in Singapore, like BusinessWeek a unit of The McGraw-Hill Companies.

The mood is especially chipper in Thailand and the Philippines, where politics has fueled the rise. The Jan. 7 election of billionaire Thaksin Shinawatra as Prime Minister of Thailand had boosted the Stock Exchange of Thailand Index 23% by the end of February. (It has since shed about half that.) Thaksin promised a corporate debt cleanup and government stimulus for an economy that Morgan Stanley Dean Witter estimates will grow by only 2.9% this year, vs. 4.5% in 2000. David Kadarauch, managing director of ABN Amro Asia Securities in Bangkok, says the stimulus, mainly rural aid, may not bust the budget as feared. Most important, "people have been given a mental uplift," he says. It's a stock-picker's market. Kadarauch likes consumer companies such as local Pepsi bottler Sermsuk PLC, which trades at four times estimated 2001 earnings.

In the Philippines, local investors celebrated the Jan. 20 ouster of President Joseph Estrada on corruption charges by driving the Composite Index up 18% on the first trading day after the new administration took office. As of Mar. 7 it was up 8%, vs. last year's fall of more than 30%. Foreign investors applaud President Gloria Macapagal Arroyo's anticorruption, probusiness stance but are waiting to see if her policies stick.

LICKING LIPS. Some brave fund managers are even eyeing Indonesia. Companies such as retailer PT Ramayana, auto maker PT Astra International, and food group PT Indofoods are very cheap, though their businesses are thriving.

The other big factor driving Asian markets--notably South Korea and Taiwan--is anticipation of a tech-sector recovery. In Taiwan, once President Chen Shui-bian and opposition Kuomintang legislators resolved their battle over a nuclear power plant, investors flocked to Taiwan's tech sector. The Taiwan weighted index was up 26.8% as of Mar. 7, after falling 56% from April to December, 2000. "Taiwan has already discounted the negative [U.S.] news," says Kristopher Thornton, equity sales manager at Indosuez W.I. Carr Securities in Taipei.

And there's some good news for local Taiwanese companies, as U.S. tech companies seek to lower costs by contracting out more of their manufacturing needs to Taiwanese operations. Some companies' performances have been remarkable. Top computer maker Mitac International's share price has rocketed 50% on rumors of new orders. On Feb. 25, Dell Computer Corp. gave laptop maker Quanta Computer Inc. a big order; its share price is up 12.8% since. Chip designer Via Technologies Inc.'s sales more than doubled year-on-year through January, and its stock is up 75% this year.

The most important Asian market to rally has been Korea, where the benchmark Kospi index is up a respectable 12.7% this year, and the tech-heavy Kosdaq index is up 43.3%. Foreign investors poured $2.5 billion into Korean stocks in January and February, driving the likes of Internet telephony company Serome Technology Inc. It has jumped 246% this year as of Mar. 7, while loss-making online mall Interpark Corp. has risen 261%. In contrast, last year global investors led the charge out of Seoul, driving the Kosdaq down 79% and the Kospi 51%.

Korea's good fortune, however, may already be old news. "The short-term rally is more or less completed," says Cho Min Keon, senior investment manager at Franklin Templeton Investment Trust Co. Staying committed to Seoul will require faith in its tech companies' ability to weather the downturn. South Korea's economic growth is expected to be about half last year's 9%. "Slowing computer demand in the U.S. shows no signs of reversing," says Samsung Electronics Co. spokesman James Chung. But the Korean government is trying to mitigate the impact, by cutting interest rates fast and taking other measures to keep the market lively.

The impact of rate drops will be crucial to all of Asia. Interest rates are coming down everywhere, from Korea to Hong Kong to Taiwan. With global interest rates falling, too, the entire region could be in recovery in 12 months, says Manu Bhaskaran, managing director, SG Research (Singapore) Pte. Ltd. "This is one of those perfect moments that don't come along very often," he says. Asia's investors know, however, not to count their chickens too soon.

By Mark L. Clifford in Hong Kong, with Moon Ihlwan in Seoul, Macabe Keliher in Taipei, Frederik Balfour in Manila, and Michael Shari in Singapore

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