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The Politics of Money
New rules as Asian democracy matures

In his 14 years in Asia, Ray Jovanovich thought he'd seen everything. But even he's been surprised by the turmoil of the past year — the plebiscite in East Timor, nine general elections across the region, and now impeachment proceedings in the Philippines and talk of them in Indonesia and Taiwan. "We have not seen what has happened in the last 12 months in the past 30 to 40 years," says the American senior portfolio manager, who helps oversee $3.1 billion in institutional money for asset-management company Indocam Hong Kong. That is why Jovanovich, 38, has focused more on regional political research in making investment decisions. He spoke with Asiaweek's Cesar Bacani.

Do investors see recent political developments in Asia as disruptive of the markets?
Of course, it's never going to be an easy road to travel. There will always be bumps and holes and challenges. But the changes are good for Asia's political and economic development. Participation [in recent elections] has been overwhelming, which indicates Asians have embraced participatory government. They are testing the limits of the checks and balances of their democracy. In the Philippines, you have a popular but peaceful revolt against the president. The way of governing in the past, the methods of exclusion, are changing. People are fighting to have a say and be allowed to criticize on a constructive basis. These are all positives in the longer term.

So what is the impact of all this on your investment decisions?
In the case of Taiwan, it was clear to us that it would be very difficult for President Chen Shui-bian to operate within a legislative structure that is dominated by the [former ruling party] KMT. We have been underweight in Taiwan this year [relative to the 17% weighting allocated to the market by the benchmark MSCI — Morgan Stanley Capital International — index] as we wait for clearer signs to emerge. The stock market index is now barely above 5,000 points, from 9,000 points before Chen's victory in March. You have to remember also that there is a synchronized global slowdown that emerged in the middle of this year. That has particular relevance for the technology sector, which is a big component of the Taiwan market.

In Korea, we have been underweight up until a month ago. We see broader reasons from the economic and political standpoints to move to an overweight position. Part of the change is because Koreans are moving to the next stage of reform. You can argue that Daewoo and particularly Hyundai [both troubled chaebol] cloud the reform effort. But you have the second banking-sector bailout package, which is putting closure and finality into the issue of problem banks. The list of 52 companies finally placed under the insolvent category is another step forward. There is a renewed commitment toward reform. President Kim Dae Jung is being helped by his winning the Nobel Peace Prize, which to a great extent renewed his mandate to lead. Korea now has a weighting of 16% in our regional portfolio. Hong Kong has 29%, Taiwan 14% and China 12%. Singapore accounts for 15% while Malaysia has 7%. The balance is in cash.

What about Indonesia, the Philippines and Thailand?
Seven years ago, these three markets accounted for 22% of the standard MSCI benchmark index. Today, they are allocated 4.5%. It doesn't make sense to focus resources in their direction. But there are always two or three really good companies [in these markets] even in times of distress.

In Indonesia, we are buying more of Ramayana, a leading department-store chain which caters to the lower-middle income segment of the population. In the Philippines, La Tondeña is well-run. Its juices and distilled water businesses are doing extremely well. The hard liquor products are also showing fairly strong growth. TV network ABS-CBN is another stock that we like. We are less than six months from mid-term elections, and ABS CBN will benefit if media companies will be allowed to run political ads. Liquefied petroleum gas distributor Pryce Corp. is doing very well on the revenue side. In Thailand, we like [entertainment company] BEC World and cellphone operator Advanced Info.

The impeachment process in the Philippines seems the most high-profile political issue in Asia right now.
The success of the 1986 People Power revolt in the Philippines inspired change in the way governments operate in Asia. What was not thought to be possible 10 to 15 years ago is possible today. We do not believe that the impeachment proceeding against Estrada will succeed. There are ensconced members of the Senate who will not break ranks with him regardless of the evidence. But I believe that he will ultimately resign for the good of the country.

Estrada has already earned his dismissal in the eyes of not only a lot of Filipinos but also of the international community. He did not continue the reform agenda started by his predecessor, Fidel Ramos. In fact he backtracked with regard to several issues, among them the open-skies agreement with Taiwan. That sent a negative message that he was trying to protect Philippine Airlines, which is owned by his friend Lucio Tan. The real indictment of the Estrada government is that it was caught up in the protection of a privileged few. The source of the country's problems is the lack of confidence in the governing process. Whatever happens, the next administration has to immediately focus on moving the economy forward and getting back on the reform agenda.

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