Citigroup Asset Management's global team of fund managers toured the Asia Pacific region recently and found institutional clients have one main concern: when to get back into Asia's tech story?
Taiwan and especially Korea enjoyed dazzling stock market rises in the fourth quarter of 2001, but many clients remained on the sidelines because of post-September 11th jitters about a global recession. Samsung Electronics, for example, was up 28% in December and up 76% overall in 2001, denominated in won. TSMC rose 20% in December and 54% in 2001, in new Taiwan dollars. Both main boards also posted good year-end results in local currency terms, although not as good as just the big tech names.
"Many clients have been bearish and have been out of the fourth quarter rally, particularly in Taiwan and Korea which are up 40% from their 2001 lows," says Ho Hsiu-mei, vice president and portfolio manager in Singapore. "Now they worry they are too late.
"We are at the earliest stage of recovery and liquidity is strong, which is positive for the long term. But Asia, especially Taiwan and Korea, are geared to the US recovery. In the short term, these markets will consolidate. We'll see more volatility as companies report their 2001 earnings. For those on the sidelines, there will be plenty of opportunities later this year."
New York-based Henry de Vismes, managing director and head of international investments, says the jury is still out on whether US corporations have the earnings to support the market's rally.
"We're not yet sure whether the fourth quarter of 2001 was unusual; it will take more time to understand the real distortions caused by 9-11," he says. "By the time the Fed meets on March 17, though, we'll have all the information."
He adds that the first quarter of 2002 is going to be the real gauge, not the end of 2001. "We are looking for a US GDP rise of 1.4% for the first quarter, versus a drop of 1.2% in the fourth quarter of 2001. We see only 1.2% GDP growth for all of 2002 because of expected volatility. That is the slowest rate of nominal growth in 40 years, and that is going to hurt the nominal growth of earnings...We see earnings still rising but at a slower rate.
"Average US corporate earnings we expect to rise 14% this year, but only 9-11% in 2003. So there is a valuation question. The US MSCI market trading average is trading at 33.2x, but in Europe and Asia the markets are only trading at 18x - this is the widest difference between the US and Europe in years. We see the greatest upside in Europe."
The catch, of course, is that Europe has a relatively low tech base, and Asian companies will continue their good performance if the US economy gains some steam. And while its recovery forecast is modest, it is still a recovery, expected to kick in during this year's second half. Asian stock markets have already predicted this, as those stunning numbers in Seoul and Taipei suggest, so maintaining those levels now depends on decent corporate results.
Ho is optimistic that Asian tech names will prosper. "The market is driven both by economics, and by liquidity," she says. Ho believes monetary policy tightening is unlikely, so investors can rely on continued liquidity. "Performance will not be broad-based. Every sector will have its leading companies. But exporters will still do the best, and in Asia, that means tech."
De Vismes adds, "Asia is inherently bullish. You only have one Marc Faber here, whereas New York is full of guys like him. I've got clients in America asking me what to do in the event of a nuclear bomb. Here in Asia, the question is, 'When is it safe to get into tech?' During the fourth quarter last year, the IPO market collapsed and left a lot of cash on the sidelines - it had nowhere to go other than into the secondary market.
"This year we'll see a lot of IPOs and that will put a lid on the secondary market. So the only way to tell where Asian tech stocks will go is to watch earnings. If you're not in the market now, wait for the US results. If you are in, get out by mid-year if growth doesn't accelerate, because at some point investors will take profits."