This Rally Might Just Be for Real

Why Southeast Asia's bourses are suddenly soaring

Early last year, Christopher Gee canceled a trip to New York after only one potential customer agreed to meet with him. "A year ago, if I tried to convince them to invest in Malaysia, I would have been met with a stony silence," says Gee, ING Barings' head of Malaysian research. But during his Manhattan road show in January, he had 25 appointments. "Nowadays, they're full of questions about what to buy."

It's not just Malaysia--overseas investors are rediscovering local stock markets throughout Southeast Asia. In Thailand, for example, foreigners have been net buyers of about $310 million in stocks so far this year after selling a combined $848 million during 2000 and 2001. Daily volumes at the Stock Exchange of Thailand have nearly doubled, to $277 million. Since the beginning of November, Thailand's main stock index has soared 37.2%, while Indonesia's has jumped 21.3%, Malaysia's 15.9%, and the Philippines' 45.3%, as of Feb. 20.

A warning: These markets have staged many false rallies during the long slump that began with the Asian financial crisis of 1997-98. "Whether it's sustainable for the rest of the year, the jury is still out," says Kenneth Ng, head of Thailand research at ING Barings. Adds Sriyan Pietersz, head of Thailand research at SG Asia Securities: "For those getting in now, it's caveat emptor. I can scent the lemmings, and it makes me nervous."

Many fund managers, however, say that this rally is different for a simple reason: The fundamentals in Southeast Asia are better. In much of the region, there's a robust economic outlook driven by stronger local consumer demand. At the same time, low interest rates are limiting the return on many competing investments, and some Asian companies--especially in Malaysia--are finally undertaking genuine restructuring. Then there are those rock-bottom, impossible-to-resist valuations in markets such as Indonesia, where stocks now trade at just 7.8 times estimated 2002 earnings. Some even say these markets are a good hedge if the U.S. recovery stalls, because most of the biggest companies--and the most attractive equities--serve the domestic market and don't rely on exports. These markets "are cheap and under-owned," says Hugh Young, managing director of Aberdeen Asset Management Asia Ltd. in Singapore.

After a long bear market, basic math works in these exchanges' favor: They're so small that it doesn't take a stampede of outside money to drive them up. Malaysia, the largest of the Southeast Asian emerging markets, has a market capitalization of just $79 billion, smaller than PepsiCo Inc.'s at $87 billion. "These markets are tinder dry," notes Han Ong, Salomon Smith Barney regional strategist. "A little liquidity can make them rise a lot."

But a small market can be an illiquid market for investors who don't want to get blocked at the exit if things turn sour. Robert Conlon, Hong Kong-based chief investment officer at Invesco Asia Ltd., says his group is looking at Southeast Asian markets for the first time since 1998, but he's sticking to the most heavily traded stocks, such as Malaysian gaming company Resorts World and Bangkok Bank in Thailand.

If investors keep coming in, however, the liquidity problem will take care of itself. One promising sign: Thailand's drought in initial public offerings seems to be ending. Fewer than 10 companies raised capital on the stock exchange in the past four years, but there are now more than 50 in the pipeline. Investors were cheered by the unexpectedly good response to the listing of the Petroleum Authority of Thailand in November. They figure that it portends well for the planned privatizations of Krung Thai Bank, Thailand Tobacco Monopoly, and the Airport Authority of Thailand. Maybe it's too soon to write off Southeast Asia after all.

By Frederik Balfour in Hong Kong

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