Investors trapped in no-man’s land

Not one of emerging Asia’s eight major equity indices from Singapore to South Korea are positive for the year. And almost all the key Asian markets are below pre-Asian crisis levels. Equity prices in Singapore, Malaysia, Thailand, Indonesia, the Philippines, Hong Kong, Taiwan and South Korea have crumbled 31.6 per cent on average so far this year. The picture in stocks is mirrored in other asset classes. Regional currencies have drooped against the US dollar – the baht, peso and rupiah by 13, 15 and 21 per cent respectively – while spreads on benchmark bonds have widened about 70 basis points on average versus US Treasuries.

SENTIMENT TOO WEAK: Darby says sentiment on Asia is too weak. "Irrespective of where you think growth is, some of the stocks now are priced as if they’re going bust, but they’re not and we’re not going to have another Asian crisis," he said. Longer term direct investors agree and are buying into the region’s recovery and restructuring story – even in markets like South Korea where equity prices are among Asia’s most emaciated. "That’s more reflective of what’s happening on the FDI (foreign direct investment) front, rather than on portfolio front and FDI could be even higher in Korea this year than last," Craig Chan, regional strategist at ING Barings in Hong Kong, said.

The Korean government says foreign investment plans totalled $10.4 billion in the first nine months of 2000. That’s already more than 1999’s $10.3 billion in FDI, which was almost double 1998’s $5.2 billion, according to figures from the United Nations Trade and Development agency (UNCTAD).The steady inflows are highlighted by a 1.2 per cent gain in the value of the Korean won this year against the US dollar, one of the few currencies in the world to manage such a feat against the ever-powerful greenback. This picture contrasts with a 48 per cent decline in the value of the country’s benchmark KOSPI share index – Asia’s worst performer this year.

CHEAP ASSETS: According to Chan, the grim outlook for portfolio investors which depresses equity prices and corporate valuations only strengthens the hand of direct investors. "Direct investments are longer term… so cheap assets and a generally strengthening story bring profit potential," Chan said.

In this scenario even equity blackspots like Indonesia – the Jakarta stock exchange index is down 40 per cent this year and valuations are so low, big funds cannot find the necessary liquidity to invest – are attractive to FDI players. Jakarta approved $2.1 billion of FDI projects in the first half of 2000, up 16.7 per cent from 1999’s $1.8 billion. India too is hopeful that FDI, which stood at $3 billion by the end of August, will surpass 1999’s $4 billion level.