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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

MARCH 31, 2000 VOL. 26 NO. 12

Tech Is in the Driver's Seat
Asian markets shrug off higher interest rates

At 6%, U.S. interest rates are now the highest they have been in over five years. And the Fed is likely to raise rates at least two, possibly three times before the year is out. Nevertheless, markets just don't seem to care. But holders of old economy stocks know that the regional rally is confined to bourses, sectors and stocks that are tech-heavy and are bypassing some traditional sectors and bourses that don't have a wide selection of tech stocks. Asiaweek Senior Correspondent Assif Shameen spoke to John Lai, chief investing officer of Nikko Global Asset Management in Hong Kong about what's next for Asian markets.

 
  ALSO IN ASIAWEEK

COVER: Seismic Changes
Can president-elect Chen Shui-bian meet the historic challenges posed by a changing Taiwan - and by China?
The Challenge: Now comes the hard part
Reality Check: Beijing will have to deal with the new Taiwan
Profile: Chen's split personality

Editorial: Taiwan and China have reason aplenty to make peace
Editorial: Asia needs new policies to combat prostitution

THE NATIONS
South Asia: Clinton to India and Pakistan - Start Talking
'Limited War': Don't let the term fool you
Philippines: Sister Christine vs. Estrada - yet another scandal
Extended Interview: Salamat Hashim calls for independence
Myanmar: Behind the secret "Chilston" meetings
Inside Story: Asia's "Insiders" - four people who have blown the whistle on wrongdoing
Viewpoint: A Malaysian race for Islamization?

ARTS & SCIENCES
People: Sumo's big brother calls it quits
Heritage: The struggle to save Penang's old George Town
Art: Digital works blur the line between tech and expression
Books: Why healthcare was so bad in Suharto's Indonesia
Health: Noni - The craze over a smelly green fruit
Newsmakers: Thai "List of Shame" riles the privileged

TECHNOLOGY
Games: Microsoft's X-factor
Computing: IBM's Deep Blue man is now into e-commerce
Cutting Edge: An e-book horror story

BUSINESS
Bankruptcy: The court-ordered restructuring of TPI suggests Thailand is coming to grips with deadbeat borrowers
Room to Improve: Inadequate laws in Indonesia and Korea
No Hype: Can Singapore's Pacific Internet regain investor favor?
Renong: The Malaysian conglomerate sells off key assets
Business Buzz: A deal to lift Singapore's spirits

Investing: How rising U.S. interest rates will affect Asia

Will continuing interest rate hikes affect Asian markets?
The initial impact of the March 21 increase was positive. Markets moved up everywhere. Clearly, investors are not worried about further hikes. If the markets continue going up, central bankers may decide that to engineer a soft-landing they need to do something more dramatic. We might see something like a 50- basis-points increase when markets are expecting 25. So if we get drastic action, which hasn't been discounted, Asian markets will definitely be impacted.

Which markets are most vulnerable?

Because of the dollar peg, Hong Kong will need to follow U.S. rate rises with increases of its own. Right now, Hong Kong is being driven by the tech stocks, but I think someday people will wake up and realize that real rates have crept up quite a bit in the past few months. Korea is another market where there has been upward pressure on rates, but it has adjusted a bit since earlier this year. Korean central bankers made some pre-emptive moves ahead of the recent Fed hike. However, with parliamentary elections next month it is unlikely we would see a rate hike there for at least another month or two.

Isn't Asia now really a tale of two markets - tech-heavy markets continuing to rise and everybody else languishing?

At this moment tech is driving everything, and I don't think that will change in the short-term. The tech rally has also de-linked one portion of the market from inflation and interest rates. The latter will continue to impact financial and property stocks, but will have no effect on Internet companies. These companies, relying solely on equity to raise money, have no earnings and little cash flow, so they can't raise money from traditional bank borrowings. Many have virtually no debts, so it doesn't matter whether interest rates go up one or two percent. That sort of swing in interest rates can make a world of difference for property, banks and some old economy companies.

With the election out of the way, is Taiwan looking attractive now?

Expect volatility and uncertainty ahead because there is no historic record on which to judge a non-KMT government. We have to see what sort of team the new president, Chen Shui-bian, puts in place. So far, the tone of his statements has been right. He is trying to calm the mainland leaders, the business community and his own supporters. Some foreign fund managers are saying the markets have gone down so much that the risks are now minimal especially since the DPP is planning to amend its pro-independence clause. But Beijing is emphasizing getting Taiwan to the negotiating table fast - or expect action. So the China risk has not gone away.

What about Southeast Asian markets?

Malaysian markets did well early in the year because of the liquidity rush and the growing economy. Singapore lost out at first as people moved their money to Malaysia ahead of its inclusion into the MSCI index. I believe Singapore can pick up momentum in coming months once the current consolidation phase is over. Singapore is one of the few places in Asia with a strong Internet and tech sector. The only problem is the paucity of investable Internet or theme tech stocks there. Unlike Hong Kong, where a lot of the old economy companies are re-inventing themselves as Internet plays, Singapore's old economy companies have neither invested heavily in Internet nor made the right moves to show they are serious about the New Economy.

So, over six to 12 months you still think it best to stick with tech stocks or that part of the old economy that is reinventing itself?

Investors who are nervous about tech valuations are turning to old economy companies that are expanding in a big way into new technologies. At the end of the day, the Internet is just an enabler, and you still need products and earnings to fall back on. In Hong Kong blue chip companies like Cheung Kong, Hutchison Whampoa, Sun Hung Kai Properties, which have a proven record of good management and products to sell and are going into the Internet, will outperform the rest of the market.

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