Asian Values

“Your first hour in Hong Kong brings home to you forcefully the immense vigour of Asia and the investment opportunities it provides,” writes my friend Martin Spring. “The new airport and its high-speed rail link to the city centre are models of modern efficiency in both design and operation. The container yards stretch for kilometres, construction sites are alive with cranes and helmeted workers, financial services operate with the slick professionalism for which the former British colony is famous.”

Construction begets over-construction just as booms beget bubbles. Asia has had more than its share of both. But economic growth is relative as well as cyclical. Coming from Europe or America, the pace of activity in Asia is so strong that even down seems like up.

“Asian Economies to Slow Through 2001,” warns an Associated Press headline from last week. The news item refers to a report from the Asian Development Bank estimating growth rates for the region.

The headline might be alarming, but if you continue reading you discover that “growth in the industrialized Asian economies – Hong Kong, South Korea, Singapore and Taiwan – is forecast to drop from 8.4% in 2000 to 4.3% this year before rising to 5.6% in 2002. China’s expansion will slow from 8% in 2000 to 7.3% this year but will again grow by 7.5% in 2002.”

The cause of the growth slowdown is, of course, the slump in the U.S. – the major overseas buyer for Asian exports. Both India and China, however, are relatively immune. They have huge internal markets and very cheap labor pools – so they depend less on exports and may be even helped by price competition.

Still, booms and busts are a fact of life throughout the region. Lynn Carpenter recalls the last bust, begun in 1997 when Thailand suddenly devalued its currency.

“The Asian Tigers crumbled one after another within a matter of day. Currencies fell brutally in Malaysia, Thailand and Singapore. Their stock markets crashed. Capital pulled out.”

And then, the boom:

“The turnaround was miraculous. In 1997, Mohammed Mahatir, president of Malaysia, wanted to try currency speculator George Soros as a war criminal. Today, Malaysia, Thailand and Singapore sit atop world trade again with the world’s largest current account surpluses (13.6%, 9.1% and 25% of their GDP’s respectively). Only Switzerland with a 9.1% current account surplus is doing as well as these Tigers.”

Is it time to buy in Asia?

Martin Spring reports a conversation with Robert Conlon, chief investment officer in Hong Kong for Investec Asset Management: “Even in a global recession, Asia will continue to gain market share. When multinationals look to cut costs, Asia is the top prospect for outsourcing supplies.”

“Growth in China, driven by a growing middle class wanting consumer goods, will mitigate some of the problems we see emanating from the US,” added Sandra Lee, head of strategic planning at J P Morgan’s JF Funds.

“One sign that international investors expect Far East equities to fall less in a global bear market,” Martin continues, “is that in the first quarter the Emerging Asia index only fell 4 per cent in dollar terms, over a period when the US fell 13 per cent, Euroland 12 per cent and the UK 10 per cent.”

“While I am not wildly enthusiastic about Asia’s economic prospects in the near term,” says old Asia hand and DR Blue Teammember Marc Faber, (who isunlikely to be confused with Henry Blodget), “I feel that, compared to Europe, the U.S. Latin America and Japan, the Asian region, including China and India, has at least moderate appeal.”

“In Asia,” Marc continues, “corporate earnings and stock markets are by historical standards still very depressed (not Hong Kong, however), and have, since 1990, grossly under-performed the European and American stock markets. In addition many stocks have a higher dividend yield than local interest rates, a condition that is rare in the developed stocks markets of the West…. [A] shift of money away from the US towards Asia may already have begun and is supported by the fact that, year-to-date, the Asian emerging markets are up, whereas the S&P 500 is down. Thus, some kind of decoupling seems to have taken place, and I strongly recommend our readers to shift part of their equities exposure from the U.S. to Asia.”

China’s B shares – those designated for foreign investors – have been the one of the best performing investments in the world; up 138% last year. But the B shares, at about 22 times earnings, are no cheaper than the U.S. Dow. On the other hand, in Shanghai as in New York, there are opportunities:

One petro-chemical company, Sinopec, traded at a P/E of only 5 recently…but has even more recently risen to 10. What’s the story at Sinopec? I don’t know. But at least the price is ugly enough to make it worth another look.

Another company, Global Bio-chem, makes corn-refined products in China and trades on the Hong Kong exchange. Sales and profits are growing at 20% and 10% respectively, but the stock traded recently for only 4 times earnings.

Phoenixtec is a small Taiwanese company that makes uninterruptible power systems (UPS). It has 40% of both the Taiwan and China UPS markets and also trades at about 10 times earnings.

Readers may recall that once upon a time, the U.S. was the dominant manufacturer of electrical appliances and electronic gear. But if you check your TV set, your cellphone or your CD player today you are likely to find that they were made in Asia, rather than Trenton, N.J.

Could the information technology industry be the next to make the move to Asia? “I have no doubt,” Faber elaborates, “that the continuous flow of foreign direct investments into China, and the transfer of technology as well as know- how in all sectors of the economy will transform China into a high-tech manufacturing powerhouse. Thus, with the help of Mr. Greenspan’s easy monetary policies, over-capacities and cut-throat competition in the high-tech sector are assured into the foreseeable future… It’s not unreasonable to assume that the day of America’s high-tech hegemony are numbered, and that both India and China will become fierce competitors in the electronics and software industry.”

Could it be, dear reader, that the best way to protect yourself from a bear market in America, as well as take advantage of the next phase, whatever it is, of the information revolution, is to buy Asian technology companies?

Kingdee International Software Group is a Hong Kong company, the leading developer of software products in China. It has a huge domestic market…not to mention the rest of the world. Sales and profits are doubling each year.

Just a thought…

Bill Bonner
Paris, France
April 25, 2001

*** The Great Rally sparked by Greenspan’s surprise 50 bps rate cut lasted for just 48 hours. The Nasdaq fell again yesterday – its third drop in as many days. Down 42 for the day.

*** The Dow also fell – 76 points.

*** Of course, there are still 450 basis points Mr. Greenspan can try. But it could be that there is something different about this slowdown – something that makes rate cuts irrelevant.

*** Alan Abelson of Barron’s: “The bubble has burst and it’ll take a lot more than ever a series of pale imitations like last week’s eruption to replicate it. And money, no matter how cheap and abundant, isn’t inducement enough to get companies groaning beneath an awesome burden of overcapacity to pile on more of the stuff.”

*** “Who cares if it’s cheaper to buy another server when you already have tens of thousands [of them],” a strategist at Salomon Smith Barney elaborated. “Should we really believe [consumers and businesses] will be willing to make big expenditures just because Alan Greenspan want them to?” adds John Crudele of the N.Y. Post.

*** Consumers are broke, Crudele explains. They can’t spend more, even if they wanted to.

*** And businesses? Earnings are going down…and there is no reason to think they’ll turn around any time soon. Pundits continue to describe a “second half recovery.” But why? Earnings might just as well go down further in the second half – and stay down for years. Why? Because both consumers and businesses need time to work themselves out of debt – before they can begin spending again.

*** Even if the Fed pushes down the rate at which banks borrow, that doesn’t necessarily mean you or I will be able to borrow at lower rates. One of the perverse curiosities of the last few weeks has been rising yields on long-term bonds. While the Fed is dropping the fed funds rate, investors are demanding higher yields – forcing up long- term interest rates. Bond yields rose again yesterday – to 5.18% on a 10-year T-note.

*** What are investors afraid of? A falling dollar, maybe. Or inflation. “The U.S. Consumer Price Index (CPI) rose 3.5% in February,” writes James Grant in Forbes, “one of the fastest rates in nine years…” Grant quotes columnist Robert Novak whose advice was unequivocal: The Fed, he wrote, “must add liquidity to the economy – in blunt terms, inflate.”

*** Yet, “on the evidence of the late boom,” writes Grant in the NYTimes, “the Fed for many years set the rate too low. A comprehensive measure of investment – including residential construction – has been soaring. Last year, it amounted to more than 18% of gross domestic product, the highest percentage since the late 1970s.”

*** “Throughout the 1990s, fixed investment in the US economy surged from just over 12% to around 19% of GDP,” writes the Fleet Street Letter’s Robert Miller from our London office. “Any recovery in the US stock market engineered by rate cuts should be viewed with suspicion.”

*** The dollar, so far, has held steady. Yesterday, for example, it rose very slightly against the euro. The dollar has no intrinsic value. And its extrinsic value is being undermined… by those who are supposed to be protecting it – rather like a young woman entrusted to the care of a relative who turns out to be a pimp.

*** But a quick look at today’s headlines helps explain why the dollar retains its appearance of virtue: “Argentina’s Economic Plight Deepens,” says the International Herald Tribune. “Brazil’s Real Hits New Low,” says the Financial Times. “Chilean peso at record low,” records another FT headline. In a world of easy virtue, a slip once in a while hardly gets noticed.

*** And gold, whose virtue is unblemished? Gold rose a mere 40 cents yesterday to $264 per ounce – a price the metal has visited off and on ever since Jimmy Carter was president.

*** Besides all of these considerations, most stocks are not cheap…and even those that are cheap may become cheaper still before the market finally arches its back and sticks out its Big Bottom. About which, more in future Daily Reckonings…

*** Amazon is still in business. In fact, the e-tailer announced last night that its results were better than expected. It only lost 21 cents per share. Recently in the single digits, Amazon is now trading at a dizzying $15. David Dreman, in Forbes, illustrates how the shares could be worth even more. Making some optimistic growth estimates (ignoring the fact that Amazon’s core business – selling books & CDs – only increased 2% over the last 12 months)…and discounting the future income stream by 15% – he comes to a possible value of $17.89 per share. Not a lot of upside for a company that may run out of cash before the year is over.

*** Yesterday, I asked Dan Ferris if he was selling his coal stocks: “Consol closed yesterday at 31 times earnings,” he replied. “The surprise is that coal will become more, not less, widely used in the next 31 years. I saw the WSJ article. I like Merrill Lynch’s bearish comments on the coal stocks. They tell me there’s plenty of room on the upside. Coal is so easy not to like and we can’t live without it…the perfect investment.” Maybe so. But here at the Daily Reckoning, we stick to the essentials. We buy low and sell high. Coal stocks are high.

*** Our energy man, John Myers reports: “We have electronic gizmos for every part of our lives. Our houses are stuffed with TVs, computers – electric toothbrushes. But the proliferation of power-operated devices only tells part of the story. Industry and commerce burn up more than half the nation’s power… and transportation accounts for more than a quarter more. That’s why companies like Ballard may have such a great future. The company has made a nice bounce from its 52-week low of $32 set just a few weeks ago.”

*** “How about Marjorie Scardino?” writes a friend who keeps an eye on The Mighty Fallen, “She’s head of the Pearson group which owns the Financial Times and other esteemed journals? Her bold, and expensive, Internet gambit at Pearson lost 113 million pounds last year, more than erasing the company’s 81 million pound profit. Once dubbed “the City’s favorite pin-up girl,” The Spectator quips, “Scardino faces a year in which her pin-up pictures will be widely used as City dart-boards.”

*** The kids went back to school on Monday, after a two- week spring break. “I don’t want to go back to school,” Henry, 10, said to me on Sunday. “I think I already know enough.” Henry can read and write in two languages. He knows basic math. Neither Mark Twain, Abraham Lincoln, William Shakespeare (if you believe he was the merchant from Stratford upon Avon), or Jesus Christ had much more formal education than that. Maybe Henry’s right.

*** Years ago, I read about an uneducated Black man who had made a fortune in banking in the Deep South. Asked how it was possible, he replied: “When you hain’t got no education, you got to use your haid.”

*** But as Bertrand Russell observed, “most men would rather die than think. Many do.”

The Daily Reckoning