Four Voices on Asia's Prospects
By Bruce Einhorn
What's in store for Asian markets in the new year? I recently asked several strategists and fund managers in Hong Kong. Here are edited excerpts of what they had to say:
Ajay Kapur is regional strategist for Morgan Stanley in Hong Kong. He believes Asian markets will benefit from a less risky environment in 2002:
I don't believe the higher risk-premium story at all. Terrorism is less of a threat now. The risk premium has actually gone down rather than gone up. The U.S. was the key driver in fighting and finishing off fascism and in condemning communism to the dustbin of history. You can't eradicate terrorism. But with U.S. involvement, terrorism is going to be minimized. Only the U.S. can do that and is doing that pretty remarkably. These things take a long time to fix. But the resolve now is very, very powerful.
In Asia, we all read about how bad the economies are. But that's just half the story. The economies are in much better shape than five years ago. Low inflation and much bigger current-account surpluses: $84 billion for Asia-Pacific ex-Japan and ex-Australia, about 3% of GDP. Five years ago there were deficits.
The ratio of short-term external debt to international reserves has gone down quite substantially. Corporate Asia has the lowest debt-to-equity ratio in the world. Our estimate of 2,500 Asian companies is about 68% [debt-to-equity ratio]. Even Korea has taken it down dramatically: 73% was the number for last year. At the peak, in 1997, it was 136%.
Yes, nominal economic growth is very slow. We understand that. But we are buying and selling stocks. Asian companies are in reasonably good shape. Valuations are looking pretty good. Asian markets are about 35% undervalued compared to global peers.
Mark Konyn, director at Dresdner RCM Global Investors in Hong Kong, is focused on South Korea and Taiwan. He cites surprisingly strong demand in Korea and a very strong showing by President Chen Shui-bian's party in Taiwan's December legislative elections, as reasons for optimism:
These are the two markets where we are seeing potential as we move into the new year. In the case of Korea, you've got domestic conditions improving. The capital account will stay in reasonable shape. We won't see the levels of imports being sucked in as in the past. Liquidity will find its way into equity markets.
Taiwan is a recovery story. For many of the tech-related exports, we have seen a bottoming out. The overhang of inventory [worldwide] has been worked through the system to some extent, and Taiwan will benefit from that. Benefits from low-cost production across the Taiwan Strait keep them quite competitive. The election result [shows] that the sentiment is improving.
For the whole region, the risk factor is a continually weak yen -- which appears to be the policy of the authorities in Japan. There's a knock-on effect [for the rest of] Asia. It increases the risk premium for investors across the region. That's a very real risk factor.
Markus Rosgen, regional equity strategist for ING Barings in Hong Kong, says for 2002, "the biggest theme of all is resumption of economic activity." Like Konyn, Rosgen favors Korea and Taiwan because of their tech plays, but he thinks a wild card could be perennially overlooked Indonesia:
I find [Indonesia] quite interesting. The Western allies look to have succeeded in fighting off global terrorism. [September 11] makes people aware that there is a huge divergence of wealth between Western countries and Muslim countries. If the world comes up with a Marshall plan for Muslim countries, any program of debt forgiveness, then Indonesia will benefit.
If you do screenings for cheap companies in the region, you tend to find that a lot of them are in Indonesia. If the global economic environment improves, then the environment in Indonesia is likely to improve. That will lead to less unrest -- if growth is better, people won't be out in the streets. [Given improving] investor sentiment, as September 11's aftermath subsides, can things get independently that much worse for Indonesia?"
Siew Hua Thio is head of Asia ex-Japan portfolio management for Goldman Sachs in Hong Kong. She believes Asia is cheap, but she has concerns that markets have risen too fast:
Valuations are looking very attractive, [historically] as well as compared to the rest of the world. If you look on a price-to-book basis, Asia is running at 1.5 times book. Historically, Asia trades at 2.0 times to 2.5 times. With regards to price-to-earnings, Asian markets are trading at 15 times or so next year's [estimated] earnings. Historically, we've traded between 13 times to 25 times.
Compared to the rest of the world Asia is looking quite cheap: The S&P 500 is trading at 25 times, 26 times, and European multiples are about 20 times.
Another positive: For a long time, the focus has been on the U.S. market. Now, on a valuation basis, we could see some reallocation of money away from some bigger markets into Asia. We have seen this happening to some extent. This could be a positive.
[But] I would be a bit cautious given that markets have had a huge runup since September 11. Clearly, a lot of expectations are priced in. There are a couple of issues to think about going forward. One, is the Fed's easing over? If so, that's a big negative for the market. Two, there are a lot of expectations about an economic recovery in the second half of 2002. Whether that's going to materialize is a big question.
At the start of 2001, the markets had a huge run with the start of the Fed cuts. When, at the end of the first quarter, the second-half recovery didn't look to materialize, we saw markets sell off. There is a risk of that happening in the coming year.
Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online
Edited by Douglas Harbrecht