OCTOBER 27, 2000 VOL. 26 NO. 42 | SEARCH ASIAWEEK
'Year of the Hangover'
More downside in the U.S. and in Asia
Stock Shopping List: Biggest losers with upside potential
What a week it has been for global markets. Nasdaq and the New York Stock Exchange slid alarmingly over stalling corporate earnings, soared on Oct. 13 as investors looked for bargains and then plunged again. Asian markets, already spooked by their own problems and worries over oil prices, got battered too. "We feel there is a little more room on the downside for most Asian markets," says William Knapp, who manages a $2.5-billion global portfolio for SSB Citi Asset Management, a member of American financial giant Citigroup. "In some ways, what is happening this year represents the consequences of last year's bull run, when some markets almost doubled from their lows in 1998." He counsels investors to diversify their holdings and consider selective buying because a sliding market is often the best time to pick up bargains. Knapp spoke with Asiaweek's Assif Shameen in Singapore.
Why are global markets seeing so much volatility?
We have been predicting for some months that U.S. growth is slowing. It is just not sustainable to see earnings expanding by more than 20% annually. Most analysts now predict U.S. earnings growth of around 15% next year. When you get [earnings] disappointments like we've seen recently from Intel, Apple and Lucent, the market punishes stocks severely because expectations were just too high. We have all been spoiled by the incredible returns in the past four or five years. This is the first year when the U.S. markets have shown a loss in nearly a decade. There is a whole generation of investors in the U.S. that has never seen negative returns.
But on a macro-economic and core-equity basis, the U.S. markets are not nearly as volatile as they seem. As of Oct. 17, Nasdaq was down over 20% for the year [to 3,213 points], while the broader S&P 500 was down 7.2% [to 1,349 points]. It has been the more volatile technology sector that has suffered. Based on what we feel are relatively conservative numbers, the U.S. markets are very close to fair value right now. We are building in a pretty big slowdown in the U.S. and the rest of the world over the next 12 months. That's not a hard landing but a slowdown. I expect the U.S. markets to be between 5% to 10% above current levels in the same period.
Equity is a risky asset, but the risk you take is rewarded if you have the patience. A typical investor's reaction in a sliding market is to sell, when in fact that is often the best time to buy. You have also to be concerned about how properly you are diversified. You have some day traders in the U.S. who buy only dotcom companies. And for some, holding a stock for four hours qualifies as a long-term investment.
Where are technology stocks headed?
They are still going to be robust growth drivers globally. Global technology and the increased productivity [it brings] has obviously been a big factor in the low inflation numbers that we have seen. Technology is going to be a powerful growth driver for economies and stock markets around the world. But the days when you could just pick any tech or dotcom stock and expect a 50% or 100% return a year are gone forever. You need to be very selective. It's probably good to have a year like the one we've had so far, where some of the froth has been taken off and expectations are now more realistic.
Are you worried about high oil prices?
I think the concerns about oil would lessen from here on. We have probably seen the peaks already. Supplies have been tight and demand has been robust, but I believe OPEC will increase production again before we get to the $40-a-barrel level. The U.S. would probably release some more oil from its strategic reserves.
What about the plunging euro and rising European interest rates?
It is not so much a weak euro as a strong dollar and yen. The dollar has been surprisingly strong in the past few years and that's due to strong economic growth there. Europe has been fairly robust, but the U.S. has been stronger. We have seen in the past year something like $150 billion flow from Europe to the U.S. as European corporations bought American corporate assets. There will come a point, as it does in every cycle, when European assets would start to look cheap and the fund flow will reverse. That's when you'd see the euro rise against the dollar.
Europe is going through an evolution. Obviously the economic union has forced restructuring in the way governments and companies do business. They are entering a globally competitive world and they have to offer competitive products. With mergers, you will see some real global powerhouses emerging. The European Central Bank has been raising interest rates because it is concerned about its reputation [to set monetary policy and defend the currency]. The danger is that by raising rates too much they could force Europe back into a recession, but I don't think it will come to that.
Japan is another key market. Are we going to see a big upside in equities there next year?
We have seen a great deal of restructuring after 10 years of economic stagnation in Japan. On a valuation basis, we find Japanese equities quite attractive right now. As government stimulus packages work and interest rates remain low, we are starting to see self-sustaining growth in corporate profitability. We still need to see further efforts on the part of the Japanese government on restructuring. The other big question mark is how soon we will see consumer spending start to pick up strongly. We need to see interest rates stay where they are right now because any increase might just derail the fragile recovery.
And the rest of Asia?
Broadly speaking, we feel there is a little more room on the downside for most Asian markets. In some ways, what is happening this year represents the consequences of last year's bull run, when some markets almost doubled from their lows in 1998. So this has been the Year of the Hangover for Asian markets.
Even though there has been a sharp pullback in many bourses, we are still fairly conservative in our view of Asia. There are pockets like Indonesia and the Philippines where there is political turmoil. Coming so soon after the 1997 Crisis, the spillover from the Philippines, for example, could be very painful for the rest of the region. We believe that Southeast Asia, particularly Malaysia and Singapore, are a bit overvalued right now. Hong Kong is probably fairly valued.
As prices come down, northern Asian markets like South Korea and Taiwan will appear more attractive. Valuations are now incredibly cheap for some globally competitive companies like Samsung Electronics, but there is concern that restructuring in Korea is not yet complete. There could be many negative surprises from all the stuff that's hidden in balance sheets there.
Remember, though, that Asia is an export-dependent region. As growth in the U.S. and Europe slow, demand for Asian goods overseas will also fall and that will certainly have an impact on the region. Moreover, the pace of corporate restructuring and reforms in Asia is still too slow. There is always a lag between the time governments announce reforms and their implementation, but in Asia that lag has been a bit too long.
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