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APRIL 21, 2000 VOL. 26 NO. 15 | SEARCH ASIAWEEK

Editorial: Down To Earth
The dotcom stock plunge gives a timely warning: Beware excesses

The bouncy high-tech stock ride of recent weeks is one only the hardiest thrillseekers could love. Turnaround Tuesday -- as April 4 is now being called in the U.S. -- saw the tech-heavy Nasdaq Composite Index free-fall 575 points, then bungy back up 500 by day's end. Markets in Asia and elsewhere mimicked their American counterpart. Seoul and Hong Kong's indexes fell about 2.7% for the week, and Taipei's 1.1%. Once-soaring Net stocks like Japan's Softbank and Hikari Tsushin found virtually no buyers on certain days this week.

Stomach-churning, no doubt -- but good for investors too. For one thing, the long-overdue correction could have been far worse. And the bloodletting hopefully has served as a wake-up call for punters over-extended on hyped-up stocks which have little more than a dot-com after their names to excuse their helium-filled valuations. Yes, a good sobering-up was needed to maintain the health of not just the U.S. stock market, but the whole world economy.

America is in a delicate stage with the dollar supported by capital infusions from abroad. If investors lose faith -- and there are enough reasons, from the record U.S. trade deficit to the widely anticipated comeuppance for the Internet stock mania -- the greenback could quickly lose altitude. The International Monetary Fund is reportedly concerned enough about America's deficit to raise the issue in its semi-annual World Economic Outlook, due later this month. Leaked portions of the report also urge the U.S. to continue raising interest rates to ease its economy and markets to a soft landing.

Federal Reserve Chairman Alan Greenspan himself had to clarify recent remarks suggesting that the Fed would set interest rates based not just on consumer price inflation, but on the rise in stock and other asset values (he denied having such an asset-inflation target). As for consumer prices, he has less reason to worry if last week's fall in oil prices -- thanks to OPEC's agreed output increases -- helps moderate inflation overall. But market nervousness remains; so do fears that a crash would shrivel U.S. consumer spending, the engine driving the global economy and Asia's export-driven recovery.

So it's good that corrections happen, instead of the markets surging relentlessly until they crash. Early April brought the Nasdaq down to its January level. That's still some 50% higher than it was last October, when Internet insanity boosted dotcom share valuations to as much as 300-400 times the companies' expected earnings per share. Business-to-consumer plays are still valued at 100-150 times -- less wildly exuberant than before, but still too high. Call it froth-bite: the excessive valuations caused by momentum buying have been skimmed from stock prices.

All of which makes one hope that the speculative fever driving markets has died down. Analysts are beginning to see a shift in the way individuals consider their investments, looking more closely at the fundamentals of shares they purchase. "People realized it was an overvalued market and everyone was wondering when the market as a whole was going to stop growing," says Osamu Wild, an Internet analyst for Jardine Fleming. "They're now looking at individual stocks more closely." And dotcom firms doing IPOs are either lowering prices to more justifiable levels or postponing the share issues.

The correction also helped renew interest in neglected old-economy stocks. Investors, who seemed to have forgotten that people do more than just surf the Net all day, suddenly woke up to that fact and began shifting money into boring old sectors like banking, pharmaceuticals and consumer goods. This mix provides a more balanced view of the economy. Moreover, it still offers a way to profit from the Internet revolution through shares of old-economy enterprises that are making use of technology to boost efficiency, cut costs, develop new markets and services, and undertake e-commerce. This is particularly so in Asia, where established conglomerates are using their piles of cash to fund or acquire dotcom ventures.

One other thing the recent market plunge has highlighted is the danger posed by margin trading, or the purchase of stocks on credit. That has surged 75% on the New York Stock Exchange (NYSE) in the past 12 months and now exceeds $265 billion. The great bulk of the increase came from individuals trading online. Anecdotal evidence suggests that recent market drops were exacerbated by big sell-offs among margin traders panicked over the money they would owe on their accounts. The association running Nasdaq has proposed raising the minimum margin to 30%, but the NYSE and the Fed preferred to keep it at 25%.

Which level is better may be debatable, but one thing is certain: markets driven by speculative expectations of endlessly rising stock values and supercharged by margin financing are more often than not casinos headed for hell. While the problem is not as excessive in Asia as in the U.S. -- the region's banks are still smarting from bad loans piled up during the Crisis -- it's best to keep it in check. Having yet to fully recover from the 1997-1998 debacle, the last thing Asia needs is another speculative roller-coaster to boom and bust.

Write to Asiaweek at mail@web.asiaweek.com

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