10/09 19:10

Asian Stocks, World's Laggards, May Extend Slump on Oil Surge

By Brett Cole

Taipei, Oct. 10 (Bloomberg) -- Asian stock indexes, which made up four of the world's five worst performers this year, may fall further on soaring oil prices, slowing demand for computer chips and rising interest rates.

Korea's Kosdaq Composite Index was the biggest decliner, tumbling 63 percent in U.S. dollar terms. Thailand's SET index and Indonesia's JCI both lost half their value, while the Philippines Composite index shed 45 percent.

Rising oil prices and weak currencies threaten to force interest rates higher as central banks look to keep inflation in check. Merrill Lynch & Co. estimates Asian economies will grow an average 6 percent in 2001 versus 7 percent in 2000 as rising oil prices boosts costs while demand for computer chips, one of Asia's key exports, loses steam amid the slowing global economy.

``You'd have to be pretty brave to buy the markets now,'' said Han Ong, head of Asia-Pacific strategy at Salomon Smith Barney Hong Kong Ltd. ``The oil price increase may steepen the descent of some markets as (it's) a tax on growth. The region is a large net importer of oil with few exceptions.''

While the surge in crude, which reached a 10-year high of $37.80 a barrel last month, has been a boon to oil producers, it drove up import costs for most Asian countries. The inflation and current account deficits that could result may end up thwarting growth in the region.

``The big question is energy prices,'' John Watson, who helps manage $9 billion in Asian stocks at Invesco Asia Ltd.

``I see them trending up.'' He recommends PetroChina Ltd., China's No. 1 oil company, and Australian oil and gas producers Woodside Petroleum Ltd. and Santos Ltd.

Rising oil prices have already taken a toll on transportation companies such as Korean Air Ltd., Korea's biggest carrier, and Evergreen Marine Ltd., Taiwan's biggest shipping company. Korean Air shares have fallen 55 percent, while Evergreen Marine is down 16 percent.

Falling Knife

The slump in Asian markets has eroded investors' confidence so much that they're hesitant to return.

``You don't catch a falling knife,'' said Albert King, who helps manage $2 billion in Asian stocks at China Securities Investment Trust Corp. in Taipei. ``Asian markets would have to rise 20 percent from current levels for me to feel confident about putting more money in Asian stocks.''

The smallest markets have proved most vulnerable. In the Philippines, President Joseph Estrada is mired in a battle against Muslim rebels that's jeopardizing efforts to keep a lid on government spending.

In Indonesia, President Abdurrahman Wahid's ability to maintain order was thrown into question by the bombing of the nation's stock exchange and the murder of three United Nations aid workers. In Thailand, Prime Minister Chuan Leekpai is likely to face stiff competition from businessman Thaksin Shinawatra in elections expected by January.

With the Philippine peso, Indonesian rupiah and Thai baht all down by at least 11 percent against the U.S. dollar this year, investors must also contend with a currency risk.

``There is no reason to be in the peripheral indexes of Southeast Asia,'' said Invesco's Watson.

Computer Chips

A recovery in Korean, Taiwanese and Japanese markets hinges on global computer and semiconductor demand. In recent weeks, Dell Computer Corp., Apple Computer Inc. and Intel Corp. all warned their sales would miss forecasts because of slackening demand for personal computers, especially in Europe.

The price of a benchmark 64-megabit dynamic random access memory chip, used in the main memory for computers, slumped by a third since mid-July. That's hurt chipmakers in the region, including Korea's Samsung Electronics Co., the world's biggest memory chipmaker, Japan's Fujitsu Ltd. and Taiwan Semiconductor Manufacturing Co.

``Semiconductor and electric components are the key drivers of earnings in Japanese industries,'' said Hisanori Gondo, who manages $137 million in Japanese equities at Mercantile Mutual Investment Management Ltd. in Sydney. He holds Hitachi Ltd., NEC Corp. and Mitsubishi Electric Corp. because their non-chip businesses are improving.

Other investors are holding out to see how strong this year's Christmas shopping season will be before dumping these shares.

``We're not prepared to give up on technology,'' said Kerr Neilson, who counts Fujitsu and Samsung Electronics among $1.4 billion in global investments he helps manage at Platinum Asset Management in Sydney. ``We're still talking about 15 percent growth this year in computer and hand-held mobile devices.'' MSCI

Upcoming changes in the way Morgan Stanley Capital International and other global index providers measure the importance of stocks are also expected to hurt some Asian markets.

According to ING Baring Securities Ltd., new weightings based on free float, or the shares available to trade, will mean companies partly owned by other companies or governments will lose relative importance on MSCI indexes.

That could force investors to sell some Japanese and Hong Kong stocks and buy U.S. and U.K. shares instead.

Those stocks may include Nippon Telegraph & Telephone Corp. in Japan and Hutchison Whampoa Ltd. in Hong Kong. Stocks in Australia, South Korea and Taiwan could end up the biggest winners, including National Australia Bank Ltd., Samsung Electronics and TSMC.

Property

For investors who need to be in the region, property stocks in Hong Kong and Singapore have proven to be one safe haven. Sino Land Co., Hong Kong's seventh-largest real estate developer, was the best performing stock on the Hang Seng Index in the third quarter, with a 46 percent surge. Amoy Properties Ltd. and Sun Hung Kai Properties Ltd. were runners-up.

Interest in the stocks revived after the Hong Kong government revealed it scrapped its housing production quota and made mortgage loans more accessible.

``At the start of the year, there was just this massive shift into technology and away from property,'' said Jack Chandler, Asia chief executive at LaSalle Investment Management, which is raising $300 million to buy real estate and property-related stocks in Asia. ``Now, there's more investment interests in things which actually make money.''

Hong Kong may also be lifted by optimism China's pending entry into the World Trade Organization will open markets and expand trade. The only regional star this year has been China, whose main indexes topped world charts as Shanghai's B-Share Index surged 64 percent.

In Singapore, a mortgage war and pick-up in housing sales in the third quarter have whetted investor appetite for property shares. City Developments Ltd. and DBS Land Co. outperformed companies such as Chartered Semiconductor Manufacturing Ltd. Rates

Whether developers continue to recover depends on interest rates remaining stable.

South Korea unexpectedly raised its key rate by a quarter point last Thursday, while Australia, the Philippines and Taiwan held rates steady this week amid speculation they, too, might tighten credit to support their currencies. The Australian and New Zealand dollars have plunged to record lows in the last quarter, ranking them among the world's worst performing against the U.S. dollar this year. A weaker currency makes imports more expensive, which can fan inflation. In Korea, the Philippines and Indonesia, consumer prices have been accelerating faster than expected.

This ``uncertain outlook'' for rates will hold Asian markets in check, said Adrian Mowat, who helps manage $1.4 billion in Asian stocks at Martin Currie Investment Management Ltd. in Edinburgh.

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-- Carl Jenkins (Somewherepress@aol.com), October 10, 2000