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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?

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NOVEMBER 19, 1999 VOL. 25 NO. 46

Still a Bull on Seoul
And positive on reform and restructuring


photo
Andrew Hitchings is not worried about the Nov. 11 redemption deadline for the bonds of ailing Daewoo. His stock pics include Shinhan Bank, Housing and Commercial Bank, Samsung Electronics and utility KEPCO
photo: Asiaweek Pictures
 
At one point last month, the Seoul stock market had fallen about 20% from its July peak, although it has lately been rebounding. Many investors are concerned that the pace of reforms may slow as the South Korean economy continues to recover. Still, there is no shortage of bulls who believe that the stock market will power ahead in the next 12 months after the troubled Daewoo group is finally broken up. Among them: Andrew Hitchings, chief investment officer for Morley Fund Management in Singapore. He spoke with Asiaweek's Assif Shameen.

How do you see the recent stock-market downturn?
The Korean market had a great run until July. The reality is that the last 100 points before the index reached the peak were very frothy and largely unjustified. That rally was mainly driven by retail investors and some foreign institutions that had left the buying too late and were panicking to get additional exposure to Korea. So the first 10% fall was just a necessary correction. The second 10% fall over the past four months is really in line with [the downturn in] the rest of the region. But I will concede that we have seen more of a reversal in Korea than elsewhere. The key is corporate bond yields - the main way people judge the interest-rate environment there - which are back up quite sharply. Two months ago, bond yields had risen to nearly 11%.

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Are the huge debts of the Daewoo group still a big sword hanging over Korea?
Initially, everyone thought Daewoo wasn't such a big problem. It turned out to be far more difficult to fix. That was a big negative and a reason for the market to come back down. The positive, though, is that government is still forcing its way on this. It may not be forcing the issue as much as we may all want, but it seems pretty determined. The commitment of the Korean government to fix the problem of Daewoo in particular and the chaebol in general is more pronounced than any other government's will to undertake reforms. There is still the Nov. 11 redemption deadline [for Daewoo bonds], but the government has said it will guarantee the papers of the biggest of the investment trust companies [with exposure to Daewoo debt]. The trust-company problem is much less of an issue now than it was some weeks ago.

You seem very positive about reform and restructuring.
Korea today is very different from the Korea of five years ago. There is more transparency. More companies are looking at return on equity rather than market share. Banks, which suffered most under the old system and were in such a precarious position during the Asian Crisis, are now the vanguards of the new corporate attitude. The government realizes that the weakness of the chaebol was their huge indebtedness and the banks were the key to that. So as the banking system is fixed and attitudes at the banks change, the whole system changes. True, chaebol reforms have been slow because most of the family-run groups didn't want to embrace change. But change is coming to Korea and the chaebol are being forced to change - kicking and screaming.

Is the recovery sustainable?
Everyone has been surprised at how sharp the rebound has been. This time last year, the consensus economic growth figure for 1999 was zero. Now, some believe it could be as high as 8%. Next year the growth is likely to be slower, probably in the region of 5.5% to 7%. But nobody believes it would all ultimately lead to a W-shaped recession. Obviously, the strong yen - it has moved from 145 to 105 to the dollar - was a factor in the sharp recovery because Korea competes directly with Japan in a wide range of industries. But interest rates also came down sharply over the past 12 months, although they are edging up again. Then there was some real corporate restructuring and reforms taking place. There are some risks going forward. The biggest is stalled reforms. When you get strong cyclical recoveries, people who should be undertaking painful reforms can sometimes manage to avoid doing that.

What sectors do you like?
Banking has been a favorite of ours. We are overweight in the sort of banks that have understood that the world is now different. We like Shinhan Bank and Housing & Commercial Bank. We are also overweight in electronics, a sector that has done well because of the global upturn. We favor Samsung Electronics, which has almost quadrupled from its lows of last year. We are not exposed much to cyclicals like automobiles, even though auto stocks have done very well. I have managed to outperform my benchmark without having much of an exposure to the auto sector. As an investor, you have to be in something like electricity utility KEPCO because it is such a huge part of the benchmark index.

What sectors do you avoid?
We have tried to stay away from too much exposure to the conglomerate elements of the chaebol, like their trading companies, or chaebol companies that hold stakes in many other affiliates. Our philosophy is to invest in operating companies rather than investment companies. We are underweight in heavy engineering and shipbuilding and cyclicals like chemicals. We think commodity type businesses with no pricing power like these do not have great long-term potential.

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