DECEMBER 22, 2000 VOL. 26 NO. 50 | SEARCH ASIAWEEK

A Little Bearish Advice
'Don't buy just because stocks are cheap'

A year ago, as Asian markets were catching fire, Robert Rountree was among the few voices warning that the region's economic recovery was fragile, that the climb back for banks was extremely tenuous, that some Asian currencies would soon come under pressure and that overall 2000 would be entirely forgettable for most markets. Rountree wasn't entirely correct: He also liked Malaysia, the Philippines and Thailand a year ago as three of the most undervalued markets with the greatest upside. They've yet to show it. Still, his overall tone of market skepticism was prescient. Today the chief strategist for Prudential-Bache Securities Asia says he has become selectively bearish. Here are excerpts from his recent conversation with Asiaweek's Assif Shameen:

Asiaweek Pictures.

What has gone wrong for Asian markets in the past 12 months?
They all have lost ground in the past year or so — generally between 15% and 50%. I guess in hindsight you could say people like me weren't negative enough about South Korea and Taiwan. I think many of us were caught by surprise in Taiwan by the collapse of the tech cycle. To an extent, this is also what happened in the Philippines, Thailand, Indonesia and South Korea. The big area where I personally went wrong was in estimating GDP growth. I didn't think the numbers would be as high as they have been. But frankly I don't feel too bad because I just don't believe these numbers are telling the whole story. If you knock out the GDP impact of [companies building up their inventories], the growth figures appear significantly weaker.

With Asian markets having been sold aggressively by investors this year, do you see a big rebound in 2001?
I think we'll see cheap markets continue in Asia. Most of these markets are selling at rock-bottom prices. But that doesn't mean you should start buying in a big way. I don't see that the cheapness is going to be priced out anytime soon except on a very selective basis. We still have a huge liquidity hurdle in Asia to overcome, and no amount of interest rate reduction in the U.S. will resolve that.

How do you see Asia's economies performing next year?
The consensus 2001 economic growth rate for Asia Ex-Japan is now about 6% against 7.3% projected for this year. I believe in the months ahead we will see significant downgrading of next year's forecast. The very loose and accommodative monetary policy of the U.S. is being reversed, and that means you should expect slowing exports in Asia. Moreover, the tech cycle has just hit a huge speed bump and that's trouble for Asia because of its heavy reliance on semiconductors, electronics components and other products that feed the PC and telecoms equipment industries.

What does the change planned by Morgan Stanley for its MSCI benchmark indicies next year — determining weightings based on how much of a company's stock is actually available for trade — mean for Asia?
First, the changes won't come into effect for another year. That said, I don't think major markets in Asia will feel much impact. The market that would benefit most in Asia is South Korea because that's where listed companies have huge free floats, particularly in the aftermath of the crisis. But I think Korea has got some big structural problems to overcome, and the problems might get worse before they improve. The new MSCI free-float mechanism should also work in favor of Taiwan. But again, I expect Taiwan will remain in the doldrums. Malaysia probably will suffer most because some of its largest companies have such a small free float.

Are foreign investors going to start pouring money into Asia because valuations have become so low?
You don't buy something just because it's cheap. It may be tempting to think that just because Asia is cheap a lot of people are ready to buy. But if foreigners are aware that they are the only buyers in Asia, they won't come in.

What do you advise investors to buy in Asia right now?
We are looking at individual stocks that have experienced either cyclical upswing or structural change. I am still fairly bullish on China. We would be buyers of China Mobile and China Unicom, the two big telecom stocks. We are bullish on Legend, one of the fastest-growing PC makers in the world. We like China Everbright because of how its banking exposure will be helped in the aftermath of China's ascension to WTO. We like COSCO, a shipping company that will also be a big beneficiary of WTO.

What are the stocks to avoid?
I'd stay away from some of these so-called consumer plays because demand is still fairly weak in Asia. Everyone is assuming that the consumer will come back strongly. I just don't see it happening. I would also avoid residential property developers in Hong Kong and Singapore because despite the fact that interest rates might be lower, the good news is already factored into their stock prices.

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