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Be specific in Asia-Pacific

Increased globalisation is breaking down trade barriers and encouraging sector analysis in many markets, for example, Europe. But the AsiaPacific region is diff erent and each country should be ass essed on its own merits.

After a period of negative sentiment and market falls, valuations are now very good in Asia. Hong Kong and Singapore – the two biggest markets – are trading at 16 times and 13.5 times 2001 earnings respectively. Across the Asia-Pacific region, one of the most important considerations remains where a company is domiciled.

The region is not immune to global themes such as the technology run seen around the globe at the start of the year b
ut whether a company operates in China or Korea is still far more important than the sector in which it operates. This is because there are many fundamental differences in the economic, political and regulatory frameworks of Asian countries.Country-based analysis remains the most appropriate way of selecting stocks.

Unlike Europe, the Asia-Pacific region does not operate as a single market with a single currency. There are no centralised political and economic institutions and, as a result, there is no region-wide economic policy. It is hardly surprising that countries within the region end up in different parts of an economic cycle.

For example, the local currency in Hong Kong is pegged to the US dollar at a fixed rate. While many other Asian currencies have depreciated significantly since 1997 – the Korean won and the Singa pore dollar have become cheaper against the US dollar by 30 per cent and 20 per cent respectively – the Hong Kong dollar exchange rate has been maintained at US$7.8.

As a result, local prices within Hong Kong have had to adjust downwards to stay competitive with their Asian neighbours. It is not surprising that Hong Kong is seeing 2 per cent deflation.

Another impact of Hong Kong&#39s exchange rate system is that its interest rate is tied to the US. Hence, the Hong Kong economy had a tough time last year when US interest rates began to go up aga inst a background of falling prices. Meanwhile, Korea and Singapore had vintage years economically last year. They grew by 10.7 per cent and 5.4 per cent respectively compared with 2.9 per cent in Hong Kong.

Having lagged behind its regional peers economically in 1999, the Hong Kong economy is now catching up on its neighbours.

Three factors are driving it. First, US interest rates are peaking. Second, deflationary forces are weakening. Last, but by no means least, its unique relationship with China is bearing fruit as China pushes through structural reforms.

The Chinese are planning to build up national champions in industries such as airlines, power, and petrochemicals by merging key players within each of those industries. Shares in these national champions will be offered to domestic and international investors and proceeds will be used to push through further reforms such as state pensions and banking as well as replacing inefficient capacity.

As one of the key service providers for China, particularly in the financial services arena, what is good for China is good for Hong Kong.

These are just a few examples of the diversity in economic systems and cycles within the Asia-Pacific region.

The economy is not the only area where differences arise. A number of other country-specific factors can have a dramatic impact on the share prices in any given country, such as politics.

One example of this is the shadow cast over telecom company Philippine Long Distance Telecom (PLDT) in the first quarter of this year. While technology, media and telecom stocks raced away, PLDT fell by 12 per cent. This was due to a widely held view that the Philippines lack political and economic leadership. Moreover, smaller markets in Asia were not performing well and even good companies in these markets were sold off.

In addition, legal and regulatory frameworks also differ significantly across countries in the region.

In some countries, such as Singapore, business laws are set out clearly. The same cannot be said for China where regulations can be ambiguous. As a result, investors attach a “certainty premium” to Singapore shares.

Regulations can have dramatic impact on the profitability of some industries, such as utilities.

In Hong Kong, for example, returns for electricity companies are dictated by a formula which is linked to capital investment, so it is relatively easy to forecast profits.

By contrast, in Korea,tar iffs charged by utilities are subject to government app-roval. If an election is approaching and inflation is running high, for example, the government can prevent companies from raising prices.

But the relevance of regulation extends beyond corporate profitability, it can also have an impact on the robustness of an economy. A clear example of this is found when you look at the economic crisis three years ago. Poorly regulated banking systems pulled the whole economy down in countries such as Thailand. Thai banks are still struggling with bad debts on their balance sheets.

The problem is that banks perform a crucial function in an economy as they act as an intermediary between borrowers and lenders. When banks are unable to perform that function, the whole economy suffers. Singapore, on the other hand, has extremely good regulation.

The result was that Sing apore was able to recover much more quickly from the crisis once the contagion effect weakened.

All these factors mean that share prices of Asian companies continue to be influenced far more by the country in which they operate than the industry to which they belong. Sector analysis is still important and can be used alongside country analysis.

But until unifying institutions are established, such as a regional central bank, and trading agreements or trading blocs (like the EU or Nafta), country analysis will remain the primary method of analysis in the Asia-Pacific region.


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