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Braced for More Pain
A sustained upswing is unlikely in Taiwan

Tina So is one of the few women fund managers in Hong Kong. "At company and analyst briefings, I am often the only woman at the table," she says. There is apparently no glass ceiling at Schroder Investment Asset Management, which recently promoted So to director and head of its investment division. These days, she closely follows economic and political developments in Taiwan, a key market whose stock market index is even lower than at the worst of the Asian Crisis. So spoke with Asiaweek's Cesar Bacani.

What is happening in Taiwan?

You need to focus on the big picture. The reality is that we are seeing weakening global demand. This is happening not only in the U.S. but also in Europe and Japan. Taiwan is especially reliant on U.S. demand. The latest National Association of Purchasing Managers index in the U.S., demand [for imports] there and retail figures suggest a very high probability of a slowdown in consumer demand for electronic goods and a moderation in corporate spending on information technology. These two factors will drive the Taiwan stock market.

But isn't the market very cheap now?

You do not buy just because it's cheap. And how reliable are the [forecast] earnings [on which this valuation is based]? We have seen earnings being revised downward in the past six to nine months. Our guess is that there will be more revisions for at least the next six. This applies not only to Taiwan but the rest of Asia as well. It will be difficult for sentiment to turn positive because investors will be focusing on problematic issues generated by lower earnings.

Have we reached bottom in Taiwan?

We have probably completed two-thirds of the bear market across Asia [including Taiwan]. The last third will be difficult because you're dealing with negative investor confidence. Two things may provide sufficient conditions for the markets to stabilize and recover. The first is synchronized monetary accommodation by central banks across the world. We need to see the U.S. begin to address the problem of slower growth by cutting interest rates. We need to see signs that the European Central Bank is moving from monetary tightening to a neutral stance, and perhaps interest-rate reduction later. We need to see Japan move toward a more neutral stance as well.

Six to nine months into the easing cycle, the markets will sense that the worst is over. People can think about spending a bit more on information technology, and then the markets will anticipate a recovery in I.T. spending and export demand for electronics. That is the time for the more cyclically sensitive countries in Asia, particularly those geared toward the I.T. and electronic cycle, to recover. You will see the likes of Taiwan, Singapore and Korea do well.

Unlike Singapore, though, Taiwan is beset by political instability and a deteriorating banking system.
The political situation definitely is not helping. You're going to have a lame duck-type of government for some time until perhaps the next legislative elections in December 2001 [when President Chen Shui-bian's party hopes to break the dominance of the Kuomintang]. We have no doubt that the new government wants to achieve a lot. That is why you see a lot of anti-corruption moves. But if you have a government that is caught between two [hostile] parties, you can't be effective.

We estimate that Taiwan needs around 15% to 20% of GDP to recapitalize its banks. One way of getting the money is through foreign participation, such as the $750-million purchase by Citibank of stakes in Fubon Commercial Bank and other Fubon affiliates. This is a very good move because once you connect yourself to a multinational, you will see asset quality improve. State-owned banks can privatize and others can sell assets and merge. But the overall environment is not conducive. You need a strong stock market, openness by banks to mergers and acquisitions, and policy direction from the government.

So is Schroder pulling out of Taiwan?

We are in a peculiar situation. In the long view, we do not see things changing drastically [for the better], but we are seeing an increasing probability [of an intermediate bounce] in the short term. We feel that the probability is rising for the Fed to reduce interest rates. Even if Alan Greenspan merely announces that the U.S. is moving from a tight to a neutral stance, it will help market sentiment. If we do see a reflex rally, being short in the market is not a good position to be in.

I prefer not to talk about individual companies. There aren't many choices in Taiwan. Banks are not a good place to be in. The rest are mostly cyclical plays like electronics and I.T.-based companies. We have no doubt that big operations like chipmaker TSMC are good companies. But even good companies are facing bad times. They need to have supportive external conditions. The year 2001 will be very interesting.

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