June 9, 2000 VOL. 29 NO. 22 | SEARCH ASIAWEEK

Yvan Cohen for Asiaweek Manu Bhaskaran is the chief Asian strategist for SG Securities in Singapore.

Hold Tight. More Curves Ahead
Asian markets won't settle until the Fed does

Asian equities have lacked direction for weeks now as uncertainty over the U.S. Federal Reserve's next move on interest rates unnerves investors. Asiaweek's Assif Shameen spoke to Singaporean Manu Bhaskaran last week to get his take on where the skittish markets are headed. As chief Asian strategist for SG Securities, an arm of French bank Societe Generale, few people have called Asia's markets right as often as Bhaskaran. He's become a bear for the short term but remains bullish on Asia in the long term.

Despite big recent corrections, why are investors still bearish on Asian equities?
There is tremendous uncertainty about the Fed's rate tightening and how long it will go on for. If the Fed is determined to slow the economy, it will eventually slow but there is a whole of host of uncertainties: Will the Fed get it right? Will it turn out to be a hard landing, not a soft one? Thirdly, there are the levels of the euro and the yen against the dollar. In Asia, our currencies are managed against the U.S. dollar and they tend to move with it. Euro-based or yen-based investors tend to hold off investing in Asia if they believe the dollar might weaken over the next few months.

But Asia's economies are recovering, earnings growth is improving and, because of the recent sell-down, stocks are much cheaper now.
That's true. But whenever there is prolonged and aggressive rate tightening by the Fed at the same time that global economies are at a turning point and global growth is appearing to peak, emerging markets built on slightly weaker foundations tend to start emitting all kinds of unpleasantness. Argentina looks a bit dicey right now because it has huge financing needs coming due this year -- to the tune of over $40 billion. But because of its peg to the U.S. dollar, domestic rates are rising as U.S. rates rise and the recovery is weaker than expected. [Also,] they have new fiscal responsibility laws forcing them to slash government spending. On top of that the Argentine currency has appreciated significantly in real effective exchange-rate terms, particularly against countries like Brazil -- its major trading partner. The woes of Argentina are right now weighing heavily on other emerging markets around the world.

If the Fed is not done with rate increases, how much lower can Asian markets go?
It's not just the rate increases but the uncertainty that causes liquidity to be withdrawn. If the Fed raises rates again in June and says they are done with it, the markets will rally sharply because the uncertainty is removed. But if they come out to say they aren't done yet then the uncertainty remains and markets around the world will stay in the doldrums.

Where do you see value in Asia now?
We like Korea, Singapore, Thailand and India. There is concern about the financial sector in Korea but the government has the capacity and willingness to move proactively to prevent the problems of Investment Trusts and other financial institutions from turning into systemic ones. The underlying economy is sound and we don't see any likelihood of massive tightening. Return-on-equity for Korean companies is improving because of prolonged restructuring efforts. Singapore has taken a huge hit but in economic terms is very resilient to the slowdown in the U.S. and has always been seen as a safe haven in turbulent times. Singapore blue chips have been hammered and there is a lot of value there now. Indian tech stocks have de-rated hugely and on our fundamental valuation model a number of Indian software stocks are now undervalued. In Thailand, the bad-loan problem will be reduced this year because corporate debt restructuring is on track. There are some very attractive stocks in Thailand -- especially the mobile-phone players, some energy companies and even some of the retail sector stocks.

Are you still bearish on Hong Kong because of rising rates?
Hong Kong is exposed to two key risks: First, rising rates that follow U.S. rates due to its U.S. dollar peg. Secondly, Hong Kong is much more exposed to China and if something goes terribly wrong in China as economies around the world slow then there is risk there. As for China shares, all the good news [about WTO, and the merger of A and B shares] is in the price [already]. The concern is the huge IPOs from state-owned enterprises over the next year or so. China needs to do these IPOs to raise cash as quickly as it can.

Malaysia is back in the global MSCI indices but where is the promised rally?
All the good news in Malaysia is largely in the price. Relative to other markets, the upside is limited simply because on the way down in the past few months Malaysia has been a fairly good hedge against corrections elsewhere. If I were a long-term investor, I would now be looking at moving out of there.

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