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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

'IT WILL GO DOWN FURTHER'

An Asian strategist sees more bear times ahead


Counterpoint Goldman Sachs' Abby Joseph Cohen thinks the U.S. Bull has a ways to run

A RAPIDLY PLUNGING YEN, competitive devaluations and even more bad news on the Asian economic front are driving markets to new lows once again. How low can Asian markets really go? A long way down from here, says ANDREW BALLINGAL, chief strategist for Schroder Securities Asia. A Hong Kong resident, Ballingal has been an Asian equities strategist for over 16 years. Last week he spoke with Asiaweek's Assif Shameen:

Why are Asian markets continuing to be hammered?

In much of Asia, excluding Singapore, Hong Kong and Taiwan, there are no real equity markets. The rest are more like options markets. There are no net assets, debt exceeds net equity and returns are below interest rates. Credit has been destroyed. What you have are bourses that display the dynamics of derivative markets - highly volatile and very thin. If debt worsens in Asia, then you can really forget about these markets. What debt does is kill equity. Take Korea: if through debt forgiveness Korea can plod along, on a sunny day Seoul index should be no more that 450. If the debt is not forgiven, the index should be no more 150 now and maybe less than 50 in 2000.

So the worse is yet to come?

Well, we went through ludicrous optimism in February. In Malaysia, the KLSE went past 700. It was like Christmas! I suggested to my clients then that they short the KLSE at 730 and borrow ringgit at 3.50 to sell when the market would go to between 400 to 450 and the ringgit to between 4.50 and 5.50 to a dollar. Look at where the KLSE and ringgit are now. (On June 16, the index was at 436 and the ringgit closed at 4.04.) Malaysia is in as big a mess as Thailand and has the same dynamics at work.

Why has Hong Kong taken such a beating when it doesn't have a debt problem?

Hong Kong has become a virtual economy and real estate is at the heart of it. Some 60% of value ascribed to Hong Kong companies is real estate-linked, nearly two-thirds of bank lending is directly or indirectly to the property sector and real estate finances most of consumption and wealth. I foresee property prices falling another 40%. Given that they have already fallen over 25%, another 25% fall from current levels will mean there will be a major banking crisis in Hong Kong.

Why is Singapore in such bad shape?

The story is very similar to Hong Kong. Interest rates are very low while inflation is falling and the risk premium is rising. Singapore residential property has been grossly overvalued. Singapore has the worst features of Hong Kong's real estate market and Taiwan's export industry. It has an overvalued currency and manufacturing still makes up almost half of the economy. On top of that, Singapore's hinterlands - Indonesia and Malaysia - are in flames. I am surprised the Singapore stock market hasn't discounted all the problems. Downside there is at least another 30%.

Is there any upside for the Philippines?

The Philippines had its wild nights out in the 1980s, so it spent most of the 1990s party in Asia unconscious on the floor. But just as it was sobering up and was heading back to the bar, the shutters went down. The problem is that the Philippines is part of the region and if the rest of Asia is going down the tubes, the Philippines is going to slide down with Asia unless Filipinos can cut themselves out and plant themselves off the coast of Latin America. The Philippines will be well-positioned to ride out early in the recovery but right now that's a long way off.

Why is Taiwan down 20%?

Taiwan's exports are going to be under immense pressure now and that will hurt the manufacturing sector. Taiwan has a lot of domestic debt though it has an excellent external position with very high foreign exchange reserves. The problem in the Taipei market is the valuation. It's all very well for the market to sell at 25 times earnings when interest rates are 3% to 4% and earnings growth is 20% to 25%. When interest rates go up to 8% and earnings are hammered, the market would need to adjust to 15 times earnings, which is equivalent to Taipei Weighted Price Index being under 6,000. (It has been in mid-7,000 levels.)

Some pessimists are forecasting a Bangkok index at 200. What's your reading of Thailand's situation?

The real estate market hasn't adjusted downward. Property prices need to go down another half from here. The clean-up bill will be at least $30 billion.

What would you tell people who want to go bottom-fishing in Asian equities?

Wait. The markets will go down further from these levels. The question investors must ask : Can they wait another six to 12 months? I think they can sit it out at least six months more.


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