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MAY 12, 2000 VOL. 26 NO. 18 | SEARCH ASIAWEEK
Forget dotcoms and focus on real technology So what now for Asian investors after their near-death experience with the plummeting Nasdaq and dotcom stocks? Husan Pai counsels bargain hunting - in the real technology sector and among old-economy stocks with exposure to the New Economy. Pai is an investment director at Indocam Asia in Hong Kong, the Asian asset management arm of French financial group Credit Agricole. He spoke with Asiaweek's Assif Shameen. Nasdaq is still in correction mode and the consensus is that it could go down 20% to 25% from its current level. The thing to remember is that technology need not equal speculative concept stocks. Sure, there are the dotcoms, which you should stay away from. But there is a real tech sector out there - companies that make computers or telecommunications hardware or software or components. There are also old-economy stocks like Hutchison Whampoa in Hong Kong which have a huge exposure to the New Economy. We have already seen a big correction on Nasdaq. Some of the concept tech stocks are already down 80% or 90% from their peak last year. Unless there is a huge drop in the broader market, I doubt there will be a steep correction across Asia in old-economy stocks. The key to me is the S&P 500, which represents the majority of companies in the U.S. economy rather than just the tech story. And Asia's economic fundamentals are different from the U.S. American growth is peaking while the Asian recovery has just begun. But U.S. interest rates are still rising and we could see a 100-basis-point increase between now and September. Hong Kong rates are tied to the U.S. because of its peg to the U.S. dollar. So yes, a 75- or 100-basis-point increase will immediately be followed by similar hikes in Hong Kong. Outside Hong Kong, though, interest rates really don't need to rise. Korea might be an exception - there might be a small rate increase there this year. But if high rates strengthen the U.S. dollar dramatically, then you might see other Asian countries raise rates slightly despite the abundant liquidity in their systems. So which Asian markets will fare better than most? In the short term, there will be some changes in the benchmark Morgan Stanley Capital Index (MSCI). Malaysia is returning 18 months after it imposed capital controls. Taiwan and China are getting increased weightings. Hong Kong's is going down, but really it shouldn't matter much because MSCI is treating China Telecom, conglomerate CITIC Pacific and computer maker Legend Holdings, which are all listed in Hong Kong, as China companies rather than Hong Kong stocks. [China Telecom and CITIC Pacific are also Hang Seng Index members.] The re-weighting is actually neutral for Hong Kong. Malaysia will be reinstated into the MSCI next month, but we haven't seen the much-anticipated rally. Foreign investors who want to be in Malaysia have been quietly buying for several months now. There are others who would rather wait until it has actually been reinstated in the MSCI. For institutional investors, the dilemma is: Do they go to Malaysia and buy anything blindly because it is back in the MSCI, or should they be underweight in Malaysia and buy stocks elsewhere which are looking attractive? As Asian markets drop following the lead of Nasdaq, Malaysian stocks seem less attractive. In the end, investors have to look at long-term earnings growth and valuations. By those measures, we aren't seeing a lot of value in Malaysia right now. Are fund managers focusing again on markets like Thailand and the Philippines because they were insulated from the dotcom craze? Will these markets outperform stocks like Samsung Electronics in Korea or TSMC in Taiwan over the next 12 months or two years? I don't think so. We still see political problems weighing on the economy or the reform process in many of these markets. While it is true that some didn't fall as much as Nasdaq, it doesn't mean they are very cheap. In the Philippines, earnings growth isn't that great either. So even if the political problems were sorted out, I doubt if people would rush in to buy. In Thailand, reform and restructuring have been far too slow. What should investors be buying if the Nasdaq correction continues? On a 12-month horizon, I still like the real technology sector - I mean the non-dotcom technology sector. The correction actually offers investors the chance to buy quality growth stocks cheaply. Taiwan companies are still benefiting from technological changes and the outsourcing trend. I like Taiwan semiconductor foundries TSMC and UMC, Samsung Electronics in Korea and Hong Kong's Cathay Pacific Airways. I would also buy Oriental Press in Hong Kong - it is a recovery story and it is cheap compared with its media peers. We are staying away from some of the telecommunications stocks right now. Though I like the cellular story, I would rather invest in handset or component makers. Write to Asiaweek at mail@web.asiaweek.com
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