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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

ENTER THE HEAVYWEIGHTS

Pension funds return to recovering Asia

By Louise Ferguson


WHAT DO YOU DO with billions in U.S. pension-fund contributions at a time when American equities are looking dangerously overbought? The New Jersey Division of Investment, which runs the $64-billion retirement nest egg of that state's employees, is turning to recovering Asia. "We feel this is the time to go back to Japan as deregulation of the whole economy is taking place," says chief investment officer Manek Kotwal. His counterpart at the $47-billion Pennsylvania Public School Employees Retirement System, John Lane, is also returning to the region: "Valuations have been out of line, and we feel Asia is working through its problems by restructuring." For its part, the $22.4-billion Tennessee Consolidated Retirement System placed $160 million in Asian equities earlier this year "because of positive valuations and renewed investor interest," says senior portfolio manager Roy Wellington.

COMING BACK TO ASIA - SLOWLY
Net U.S. Mutual Fund Flows, $ millions
Area of Investment 1996 1997 1998 1999*
Global Equity 9,458 4,429 1,452 1,177
International Equity (ex-U.S.) 26,165 17,169 7,565 -387
Emerging Markets 4,798 2,005 -1,476 18
Asia Pacific ex-Japan 1,548 -2,038 -681 168
Latin America Equity -181 544 -916 -36
European Equity 976 1,190 3,120 -939
Japanese Equity -164 8 207 402
U.S. Corporate Bonds 10,519 14,372 6,832 2,099
*January to June
Sources: ABN AMRO and AMG Data Services
You know a stock market rally has good chances of becoming sustainable when the big boys rejoin the game. We are not talking of short-term punters here. Pension funds typically are ultra-cautious about where they park their cash. Once invested, however, they will not cut their losses and run unless a cataclysm such as the Asian Crisis hits. So their return is a welcome vote of confidence in the region's prospects. That said, institutional investors have yet to fully open the taps. "There is always a risk that if asset prices recover, the sense of urgency disappears," says David Ruan, deputy CEO at AXA Investment Managers in Hong Kong, which manages more than $300 billion in institutional funds. "Some companies may slow the pace and put their feet up."

One favored market is Japan, the recipient of $402 million in net U.S. mutual fund flows so far this year (see table). The rest of Asia enjoys a net inflow of $168 million. South Korea and Thailand are key beneficiaries. "They are leading the way to recovery with reforms of domestic industry and the introduction of bankruptcy laws," says New York-based Doug Dooley, managing director and emerging-markets equity portfolio manager at J.P. Morgan Investment Management, which handles more than $100 billion in institutional money. As to sectors, banking and telecommunications are the favorites, with retail, property and exporters also stimulating interest. "Sales of small-ticket items [like electronics] are picking up, one of the first signs of a positive trend in an economy," says Hong Kong-based Anthony Muh of SSB Citi Asset Management, which oversees $338 billion in institutional funds.

The key word is restructuring. "We believe the real driver for Asian equities is not cyclical but structural adjustments which will boost corporate earnings," says Afsaneh Beschloss, treasurer of the $10-billion World Bank Staff Retirement Plan in Washington. "While some would say the pace and extent of the adjustments have been slower than desirable in some countries, we believe the foundations are being laid with broader domestic foreign ownership and flexible exchange rates." The retirement fund, which aims to increase its exposure to Asia from $290 million to $320 million, is particularly interested in restructuring plays like those in Singapore's financial sector.

The big boys are not as interested in fixed-income instruments, such as bonds. "There is no compelling reason to buy into Asian issues until the pricing improves," says Mark Konyn of Dresdner RCM Global Investors, which has $65 billion under management. Spreads have tightened as Asian interest rates continue to fall. For the next six months, SSB Citi Asset Management is back to neutral from an overweight position in Asian fixed-income paper. The Tennessee Consolidated Retirement System has $220 million in yen-denominated bonds, but has no plans to add more or buy other Asian debt. Leighton Shantz, the fund's senior portfolio manager, says interest rates must rise first before he will start buying.

What happens if the U.S. raises interest rates again? "It would be natural for [Asian] markets to correct," says J.P. Morgan's Dooley. The Federal Reserve signalled June 30 that it is neutral on more increases. The other wild card is Japan. "To date, reform there has been through attrition rather than major movements," frets Nigel Emmett, vice president and international equity portfolio manager at J.P. Morgan. However, if Japan recovers too rapidly (first quarter GDP growth this year was clocked at nearly 8% on an annualized basis), the world's second-largest economy may suck in global funds, forcing the U.S. to raise interest rates to attract its share of the money. "That will not be equity-friendly for Asia," warns AXA's Ruan. For now, though, he and other pension managers are beginning to see the region as a place to invest in - again.


This edition's table of contents | Asiaweek home

AsiaNow



WASHINGTON
U.S. secretary of state says China should be 'tolerant'

MANILA
Philippine government denies Estrada's claim to presidency

ALLAHABAD
Faith, madness, magic mix at sacred Hindu festival

COLOMBO
Land mine explosion kills 11 Sri Lankan soldiers

TOKYO
Japan claims StarLink found in U.S. corn sample

BANGKOK
Thai party announces first coalition partner



TIME:

COVER: President Joseph Estrada gives in to the chanting crowds on the streets of Manila and agrees to make room for his Vice President

THAILAND: Twin teenage warriors turn themselves in to Bangkok officials

CHINA: Despite official vilification, hip Chinese dig Lamaist culture

PHOTO ESSAY: Estrada Calls Snap Election

WEB-ONLY INTERVIEW: Jimmy Lai on feeling lucky -- and why he's committed to the island state



ASIAWEEK:

COVER: The DoCoMo generation - Japan's leading mobile phone company goes global

Bandwidth Boom: Racing to wire - how underseas cable systems may yet fall short

TAIWAN: Party intrigues add to Chen Shui-bian's woes

JAPAN: Japan's ruling party crushes a rebel at a cost

SINGAPORE: Singaporeans need to have more babies. But success breeds selfishness


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