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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

Virtues of the Long View

Expect an upturn in Asia -- after 18 months


AS GLOBAL EQUITY MARKETS crash, Roger Yates is sitting and waiting. Like many international fund managers, the chief investment officer and head of global equities for LGT Asset Management in London believes that bargains are bound to be thrown up by the current turmoil. Yates spoke with Asiaweek's Assif Shameen.

What triggered last week's global equities meltdown?

All this is happening against the background of a very mature bull market worldwide, with the exception of Japan. The U.S. has doubled in not much more than 18 months. All the major European stock markets touched record highs. So did Hong Kong. Latin America has been blazing; East Europe has shot to the moon. It's always difficult to pinpoint the catalyst for a free fall, but the one prerequisite is that investors must have already made a lot of money.

Because markets have generally fallen on the back of very high valuations, it is not surprising that investors around the world are taking defensive action. In turbulent periods, investors try to sell markets where they perceive there is a problem. That's what you've been seeing in Southeast Asia and lately in Hong Kong. The second thing most investors do is sell what has not gone down and that means U.S., European and even Japanese stocks. That's the pattern we saw in 1987, the last major global crash in our memories.

Has anything changed fundamentally in the past weeks to push markets down?

On the face of it, not much has changed. The world basically is looking at reasonably robust economic expansion. The U.S. economy has been pretty strong. There are signs of more robust recovery in Europe and Britain. Overall the world economy today is stronger than it was a year ago. All this [growth] is taking place against the backdrop of virtually absent inflationary pressures. In my view, it is these that have really driven the markets -- good growth and low inflation.

If you take the long-term picture, equity prices can keep going up as long as inflation stays low. You have had massive devaluation in Southeast Asia, which is essentially deflationary. All those Americans who were buying cheap Southeast Asian-made goods now find those products are suddenly 20% to 25% cheaper. That reinforces the phenomena of disinflation. Still, the markets in the short-run are probably headed lower because you have asset prices that have risen far too fast and because there might be interest rate hikes. And earnings growth is going to be lower next year and the year after. But the longer term picture -- by that I mean beyond the immediate 12 to 18 months -- is still a positive one for equities.

If Wall Street falls again, how would Asia fare?

Obviously, Hong Kong will be affected most. Maybe the falls in Hong Kong won't be as big as in Wall Street in the coming weeks because the market has already corrected sharply since its highs three months ago. But it is safe to say the U.S. will continue to weigh down Hong Kong. I don't think a 15% plunge in Wall Street would produce a 15% fall in Singapore or Bangkok because markets there have already taken a lot of beating.

When will the Asian bear-run end?

We expect a reasonably extended period of markets going nowhere. Nothing exciting is likely to happen in Asia in the next year or so. The markets will remain in the doldrums until you get the scale of economic adjustment in the region required to justify higher prices. There will be lots of clues as to when that starts to happen. The best of all will probably be strong export growth, one of the principal means by which Southeast Asia's economic ills will be cured. You also need to work out their debt problems. In Hong Kong, we don't believe that the peg would give way in the foreseeable future, though it is true that to defend the peg, interest rates will stay high. That will depress property prices and bank earnings. But the real reason the Hong Kong stock market has done so well since 1989 is that it represents a premier play on what is the world's greatest growth story -- China.

So what should investors do?

By all means take defensive action to protect your portfolio. But the biggest mistake most investors make over time is not being invested during the relatively small number of days that account for the bulk of market returns.

Where in the region do you see buying opportunities?

On days when Hong Kong had been hammered badly, we bought very selectively. We think the electronics sector in Asia is going to be a major beneficiary of the devaluation, and that means some electronics stocks in Singapore and Taiwan. Aside from that, I am waiting to see which markets fall furthest and where values will emerge.


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