MAY 26, 2000 VOL. 26 NO. 20 | SEARCH ASIAWEEK
Barton Biggs on where to put your money
The professional was wrong and the amateur right - for a while anyway. For months Wall Street had been witness to an amiable but very public media debate between Barton Biggs, chief equity strategist at Morgan Stanley Dean Witter and chairman of Morgan Stanley Asset Management, and, well, his plumber, Ron Valentine. Bear Biggs had been predicting higher interest rates and weaker U.S. equity markets, and been roundly booed for getting it wrong by Valentine, an investor overweight on tech stocks. No longer. Now Biggs is looking prescient, and Valentine has gone quiet. Just before the U.S. Federal Reserve raised interest rates by half a point May 16, Biggs and Senior Correspondent Assif Shameen ran through the outlook for various Asian markets, having already taken the hike into account. Biggs is known for his big calls on Asia. In 1993 he pronounced himself "maximum bullish" on Greater China and helped spark a regionwide bull run that saw markets generally doubling in a year. In 1997 he turned "bearish" on Asia just before the markets collapsed. Now he is again "very bullish" on Asia.
Is the correction in U.S. equities over or is there still a lot of downside?
I hope we are in nothing more than a cyclical bear market, which to me means a decline of 20% to 25% in the Dow and S&P indices and of perhaps 40% to 50% in the [tech-heavy] Nasdaq. I believe we are now more or less two-thirds of the way through that process. We are going to see a further increase in rates - the latest isn't going to be the last. The trend worldwide is excess capacity and a low rate of inflation. But in the short term inflation almost everywhere is beginning to pick up, particularly in the U.S., where we are now starting to see relatively serious increases in labor costs. It is one thing to have increases in oil prices, which can go down just as fast as they went up. Increases in labor costs are more embedded.
You are particularly harsh on the so-called TMT - technology, media and telecom - stocks. Are they still overvalued?
Yes. This cyclical bear market is all about taking the extreme excesses out of the overblown TMT sector. The valuations in the entire sector, not just dotcoms, have been incredibly excessive. As far as stock selection is concerned, the biggest trend in the world today is away from tech and telecom companies. I don't like them. Period. As the cycle turns downward for these companies it is not going to matter where they are. They are just going to get sold.
This time last year you were very bullish on Japan. Now foreigners are net sellers there. Is it time to get out of Japan?
No, I don't think so. Japan was the best- performing big market in the second half of last year and in the first couple of months of this year. The problem is that Japan has a high TMT component as well, so the Japanese market has been hurt by that. The other factor has been the re-balancing of the Nikkei. Everything I see in Japan on the fundamentals still looks reasonably favorable. The economy is coming along slowly but about as we expected. GDP growth this fiscal year could be between 2% to 4%. Corporate earnings are coming through even better than we expected. Restructuring is continuing. We are dazzled by the changes in Japan. Look at the way Japan is using wireless technology to access the Internet. That's a really big deal in an economy that has a very archaic distribution system.
What about the rest of Asia?
I am surprised at how weak non-Japan Asia has been because the fundamentals are so good. True, the current account surpluses across the region are now declining but that's actually a big positive because it is only a natural response to stronger domestic economies. Asia is importing more and Asian consumers are spending more. These are all good signs that point to only one thing: After two years of recession, Asia is in advanced stages of recovery. I really believe that Asia, ex-Japan, is now the best place to invest.
Yet many fund managers are turning bearish on Hong Kong precisely because of its vulnerability to U.S. interest rates.
I am not bearish on Hong Kong at all. The story of Hong Kong is how it has reinvented itself, as it always does. It is becoming much less of a real estate-dominated market and is much broader now. Obviously, there was a speculative TMT bubble in Hong Kong, with all sorts of Internet companies selling at ridiculous prices. But that bubble has been pretty much pricked, though the TMT companies there are still overvalued. The most important fundamental for Hong Kong is not what happens with tech stocks on Nasdaq but what happens in China. Recent developments in China are most encouraging. Deflation is coming to an end, economic growth is strong, consumer confidence is coming back, companies are hiring and unemployment is much less of a concern. Increasingly, investors are looking at Hong Kong really as the stock market of China rather than a play on the domestic Hong Kong economy. I am fairly bullish on Hong Kong on a 12-month view.
What about Taiwan?Is it too tech-heavy, and is the China specter too scary?
I am not bothered about China's saber-rattling. But I am concerned that Taiwan is a very tech-heavy market, though it has some real tech companies in the basic technology sense rather than the dotcoms that have been the rage elsewhere. But it is going to be hard for Taiwan to resist the global trend against technology stocks.
How do you see the other big market in Asia - Singapore?
As I said, I am positive on Japan and the rest of Asia, but the one market I am most positive on is Singapore. We are once again overweight on Singapore. The reasons are continuing growth, continuing reinvention of Singapore as well as the soundest financial institutions and the best management in Asia. I particularly cite the likes of DBS Bank, OCBC Bank and Singapore Airlines. Great companies, and very attractive at current valuations.
South Korea was a favorite of yours, but the market is off the boil.
South Korea has come a long way but it has got some way to go too. As in all countries, there will be a step back and there will be reactions from organized labor and the dispossessed due to sweeping restructuring. But if you look at equities, the valuations are just too compelling, more than discounting all the problems. There are a lot of bargains. At these prices Samsung Electronics is by far the cheapest major technology company in the world.
Can the Indian market keep soaring?
In its own halting way, India is on track to generate 6% to 7% real GDP growth for the next five to 10 years. That's a pretty good trend growth rate for any country. India has always had a lot of good [traditional] companies, and for most of them the valuations don't seem unreasonable. I am very positive on India except for tech-related companies. Even though these are great companies with a great future, the valuations are just ridiculous.
You have said you are disappointed by the lack of momentum in Thailand.
The trouble with Thailand is the non-performing loans which weigh heavily on the banking system. It is very disappointing that the Thais have been as slow as they have been to sort out the NPLs. Having said that, I believe that Thailand will be an opportunity at some point. There are a lot of cheap stocks in Thailand.
Is there value in Malaysia too?
True, the market has done well and the economy has recovered. But Malaysia has too many unresolved issues. They have lagged behind in restructuring. There are still problems of cronyism and politically-connected companies, of lack of transparency and [good] corporate governance. I don't see great value in Malaysia.
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