Asia: The Importance of Being Picky

For investors in the major bourses of Asia, there's cause for celebration. Market indexes in Hong Kong, Taiwan, and Bombay have clocked double-digit gains this year. Malaysia's initial public offering market is red-hot. The combined exports of China, South Korea, and Taiwan shot up 23.7% during the first half, driving tech stocks higher. And even in regional laggard Japan the economy has awakened from its deep slumber, sending the Nikkei 225 index up 19%.

What investors see is that Asia is likely to be the biggest beneficiary of a sustained rebound in U.S. tech spending. Another plus is China's development as a vast market for imports from regional suppliers. And many Asian stocks are still cheap by global standards. ``Asian equities could continue to rally for some time to come,'' figures Deutsche Bank Chief Asian Economist Michael Spencer in Hong Kong.

Yet playing this rally right won't be easy. First, things could get ugly if the nascent U.S. recovery falters or terrorism strikes another major blow. Second, say the money pros, the easy yen and rupees have been made. So investors should look for companies with dominant technology or a clear cost advantage over rivals. ``The trick is to pick stocks that are safe bets long-term and haven't already priced themselves out of the market,'' says Hugh Young, founder of Aberdeen Asset Management Asia in Singapore.

In Japan, the smart money is in stocks with heavy exposure to the U.S. and China. Goldman, Sachs & Co. equity strategist Kathy Matsui, who predicts the Tokyo market will rise an additional 20% over the next year, likes Toyota Motor Corp. The world's third-largest auto maker is grabbing global market share and expects 15% pretax earnings growth in the second half of its fiscal year. She thinks Matsushita Electric Industrial Co. is another safe bet. It has 16% of the global market for flat-panel TVs and a bigger presence in China than any of its Japanese rivals. Outside Japan, South Korea's Samsung Electronics, which barely lost a step during the IT slump, has continued to gain market share for its lineup of semiconductors, liquid crystal display panels, and digital cellular phones. It's big in China, too. ``There is no doubt Samsung will continue to outperform the market,'' says Lee Jeong Ja, equity strategist at HSBC Securities Inc. in Seoul.

Tech stocks are hot all over. Ajay Kapur, regional equity strategist for Citigroup Smith Barney, likes Taiwan's Compal Electronics and Quanta Computer, which make notebook computers for Dell Computer and Hewlett-Packard, among others. On Aug. 25, both companies reported a 60% surge in second-quarter profits, to $76 million and $93 million, respectively. Rising markets have also increased the risk appetite for tech startups. In Malaysia, some newly listed shares have more than doubled since their launch. You've probably never heard of AKN Messaging Technologies, which designs messaging software for mobile phones. Too bad: Its shares have soared 520% since their public debut in January.

Investors also are bullish on Indian companies, though the recent terrorist blast in Bombay could give them pause. India's economy is projected to expand 6.4% this year, and the benchmark Sensex is up 22.5%. Not only is the country a global high-tech outsourcing hub but it also has become the world's low-cost producer for commodities such as steel. Tata Iron & Steel Ltd., one of the world's most competitive producers, has seen its stock rise 67% this year.

For investors wary of overexposure to the U.S. economy through export plays, Thailand is an alternative. Its key stock market index is up 48% this year, mostly on the strength of domestic demand. Geoff Lewis, Thai stock strategist for JF Asset Management, notes that Thai stocks are rising because ``you've got a consumer buying boom'' driven by government spending and the expansion of credit markets. Lewis likes Siam Cement, which is benefiting from a home construction binge, as more Thais take out mortgages.

For a region that suffered through the U.S. high-tech bust and then the SARS epidemic, the recovery is welcome news. While there's no guarantee these gains will be matched in the second half, promising picks remain for discerning investors.

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