INVESTMENT TIPS - JULY 2002

Those who missed the six-month rally, post-Sept 11 last year, now have a second chance to buy into Asian bourses which have pulled back over the last two months.

Sharpest pullbacks seen in South Korea, Taiwan & Singapore

South Korea and Taiwan saw the sharpest pullbacks, correcting more than 20 per cent from their highs in April.

Nasdaq's sharp fall in recent months affected the performance of Asia's tech sector which is dominated by Korean and Taiwanese companies.

South Korea and Taiwan had also enjoyed one of the sharpest rallies in Asia post-Sept 11.

Fund managers who were sitting on hefty gains decided to take some profits amidst renewed economic and political uncertainties, in the second quarter of this year.

The local bourse also saw a sharp sell-off. The ST Index corrected by 15 per cent from its high in March, as blue chips succumbed to profit-taking after a strong rally over the preceding six months.

South Korea, Taiwan and Singapore are also one of the most export driven economies in Asia.

This is another reason why these markets have seen one of the sharpest corrections in Asia since March/April.

After registering a strong 6.1 per cent growth in the first quarter, economists expect the US economy to slow down sharply to 2.9 per cent in the second quarter.

This led some fund managers to take profits from export-driven markets, in search of those with a larger domestic economy.

South-east Asian markets have held up better than North Asian markets

Interestingly, Southeast Asian markets like Malaysia, Thailand and Indonesia have held up better than their Asian counterparts, falling by between 8 per cent and 12 per cent from their recent highs.

The better performance was because fund managers were shifting some money from North Asian bourses into South-east Asian markets, which have seen one of the sharpest sell-offs in Asia over the last five years.

These fund managers felt it made sense to invest some money in South-east Asia as the risk-reward trade-off looked attractive with global portfolio managers turning more positive on Asia.

Good reasons to be bullish on Asia

There are indeed good reason to be bullish on Asia over the next 12 to 18 months and the recent correction presents a good buying opportunity.

Global portfiolio managers are likely to allocate more funds to Asia in the next 12 months.

Fund managers say that Asia is likely to outperform the US as valuations are more attractive. Also, earnings expectations in Asia are more realistic and are likely to be exceeded. In contrast, earnings on Wall Street appears too high and are currently being downgraded. So there is a bigger risk of earnings disappointments in the US compared with Asia.

Fund managers also say that Asia has also gone through a longer period of restructuring and consolidation after the crisis in 1997-98 and it's ahead of the US in this respect. The stock market bubble had only burst in the US recently and it will take a longer time before the consolidation is over. So there is a good chance that Asian bourses will recover ahead of US markets.

Recent fund polls reinforce the Asian story

Two recent fund polls offer more reasons to be bullish on Asia.

The first was a survey of 26 fund managers (managing $51 billion in assets) conducted by the Government of Singapore Investment Corporation (GIC) in mid-June. These fund managers said that Asia remained their top choice. 72 per cent said they will be increasing their equity allocation to Asia in the next 12 months.

68 per cent of the fund managers were also bullish on Asian currencies, which are expected to appreciate against the US dollar by end-2002. Top currency choices were the Australian dollar, Korean won, Indonesian rupiah, New Zealand dollar and the Japanese yen.

Aside from attractive valuations, fund managers said that they liked Asia because of the region's stronger current account surplus in recent years which has helped Asia to triple its foreign reserves from US$300 million to US$840 million over the last five years.

The second fund poll that came out strongly in support of Asia was the monthly Dow Jones Asian Fund Poll of 12 leading regional fund managers. The findings of that poll were unveiled on Thursday. It showed that fund managers are most bullish about the Asia (ex-Japan) region compared with the US, Europe and Japan.

South Korea, Taiwan and Thailand were highly recommended in the poll. Fund managers also turned more favourable towards Malaysia despite Prime Minister Mahathir Mohamad's announcement that he will quit politics soon.

Malaysia looks attractive

Fund managers say politics have clearly become more of an issue to watch in Malaysia, but they don't think political risk has risen to a point where it could change their recommendations. Some even said it's positive that Mahathir, 78, is now addressing the succession issue.

In a report out late last month, US brokerage, Merrill Lynch, called on its clients to buy Malaysian stocks. It said that Malaysia's politically inspired stock sell-off after Mahathir's announcement that he plans to resign provides an "unequivocally compelling opportunity" to buy into the market at current valuations.

Singapore oversold

Singapore is another market that appears to be gaining favor after blue chips saw a sharp sell-off from the recent high in March. The ST Index has corrected 15% from its high. Fund managers and analysts reckon that the downside is limited from current levels and expect the market to recover by up to 15% in the next six months.

Recommended Asian funds

The WorldCom and Xerox debacles have further dented confidence in the US corporate sector. The short term impact on Asia will be mildly negative, but in the medium term, it may lead to an outflow of funds from the US equities to Asian stocks which are seen as less risky bets from the standpoint of corporate governance.

For those looking to invest in Asia, some funds to consider include the Aberdeen Pacific Equity Fund, INVESCO GT Asia Enterprise Fund, Savers Korea Fund, Franklin Templeton Korea Fund, Schroder Singapore Trust, Aberdeen Singapore Equity Fund, Aberdeen China Opportunities Fund, HSBC Indian Growth Fund, Aberdeen Malaysia Equity Fund, Savers Malaysia Fund, Aberdeen Thailand Equity Fund, Savers Thailand Fund and AIG Acorns of Asia Balanced Fund.

Sanguine on tech sector

Asia aside, fund managers are also sanguine about the technology sector. Nasdaq has been sold down sharply and it is currently at levels that prevailed five years ago, effectively wiping out the irrational exuberance of 1999 and 2000 when the technology bellwether rose to a high of about 5,000.

Tech companies are expected to post strong year-on-year earnings growth in the second half of this year, aided partly by last year's low base and an improving economy. Fund managers therefore expect tech stocks to stage a rebound in the second half and see the current weakness as an opportunity to accumulate.

Recommended tech funds

Some global tech funds to consider include the Schroder Global Technology Fund, Aberdeen Global Technology Fund and Henderson Global Technology Fund.

Fund managers are also bullish about the Asian tech sector. In addition to the cyclical recovery in the global tech sector, Asian tech stocks are also expected to benefit from the secular outsourcing theme which should continue to prevail for many years to come. As global tech companies strive to contain cost, they are expected to outsource more of their non-core activities to their lower cost Asian tech counterparts.

Asian tech funds to consider include the UBS Asian Technology Fund and ACM Asian Technology Portfolio.