Boiling-Hot Bourses

Will the good times keep rolling for Southeast Asia's stock markets?

China isn't the only Asian nation attracting gobs of speculative cash from the West. In Southeast Asia and Korea, stock markets are the hot investment destinations. Most are up by double digits over the 12 months ended Mar. 21, led by Indonesia's 55% and the Philippines' 41%. Korea, a laggard in 2004, is up 8% since the beginning of the year. Fund managers think the good times will continue to roll, thanks to an investor-friendly mix of low inflation, high growth, and stronger currencies from Singapore to Seoul.

Even as U.S. interest rates rise, the chief question seems to be whether taking money off the table is worth the risk of missing out on further gains. "People are looking at how far most of these Asian markets have come in the past 18 months, and there is a temptation to take profits," says investment guru Mark Mobius, who oversees Franklin Templeton Investments' (BEN ) emerging markets portfolio. "But valuations are still unbelievably low, even after the run we've had."

The fat returns have attracted an influx of hot money from the industrialized world that is adding fuel to the markets, pushing up local property prices -- especially in Bangkok, Hong Kong, and Kuala Lumpur -- and putting pressure on local currencies. The share of stocks owned by foreign investors is 50% in Korea and 25% to 40% across Southeast Asia. Net inflows from U.S. mutual funds into Asian equity markets, except mainland China, top $150 million a week and have been positive for a record 25 straight weeks. "Clearly there is a consensus among U.S. investors that Asia equities will outperform U.S. equities over the next few years," says Markus Rosgen, Asia strategist for Smith Barney Citigroup (C ) in Hong Kong. A crucial factor buoying regional markets is the weak dollar. Investors get extra bang for the buck when their currencies are rising, as almost all are against the dollar.

Unlike the last big bull run from 1993 to 1996, when the Asian markets were driven to new heights by local investors, the current rally is largely foreign-driven. Malaysians, Thais, and Indonesians were so badly burned in the 1997-98 financial crisis that most still can't be persuaded to leave the safety of their low-interest savings accounts. Bank deposits in Asia outside China and Japan were $2.7 trillion in December, up 11% for the year.


Do they know something the foreigners don't? One issue is whether the foreign inflow will ebb as U.S. rates rise -- which they did for the seventh time in two years on Mar. 22. Higher U.S. rates for Treasuries and other bonds create a safe alternative to volatile emerging markets. No investor flight has happened yet, but hot money can leave the region as fast as it roars in. "All the talk about re-rating of Asian markets is mere rationalization by fund managers [about] why they are continuing to invest in the region despite higher interest rates and slower global growth," says Michael Spencer, chief economist for Deutsche Bank (DB ) in Hong Kong.

For now foreign investors sense little danger of a stampede for the exits, in part because Southeast Asia and Korea's corporate landscape has changed a lot since the financial crisis. Back then Asian bourses were dominated by highly leveraged conglomerates. But in recent years, Asia's biggest companies -- like Thailand's Siam Cement -- have repaired their balance sheets by cutting debt levels and costs.

There's also a compelling macro story. Smarter corporate spending and strong consumer demand, coupled with bountiful exports, are powering solid gross domestic product growth throughout the region. "Global investors are coming around to the view that Asia will have stronger growth than any other region in the world over the next few years," says Christopher Wood, chief Asia strategist for CLSA Asia-Pacific Markets. That will likely keep foreign investors in Asian markets -- no matter how wary the local population might be.

By Assif Shameen in Kuala Lumpur

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