Asian Stocks Fall Into ‘Buy and Hold’ Category
The once red-hot stock markets of Asia’s emerging economies suffered stunning declines last year, with the Iraq-Kuwait crisis. This year many of those markets have climbed back, yet most still are well below their 1990 highs. Some foreign investors seem to be very skittish about making a long-term bet on Asia’s emerging stocks.
Not so Elizabeth Tran. As managing director of the $200-million Prudential Asia Fund Management Ltd. since 1988, Tran has been an adept stock picker in Asia’s youngest markets. Based in Hong Kong, she has managed stock portfolios since 1980 and now runs two funds specializing in emerging Asian markets for Pru’s large clients.
She shared her views in a recent visit to Los Angeles:
Question: We keep hearing that large American investors, such as pension funds, want to invest in Asia in a big way in the ‘90s, even though they’re gun-shy right now. Do you believe they’ll come in?
Answer: Yes. We are expecting a lot of American money. Everybody (among large investors) is talking about international investments now, usually for 10% of their portfolios. I think your public pension funds are going to do it, and they’re going to do it all at once--from zero to 10%.
Q: What’s your basic investment philosophy on Asian markets?
A: We regard them as buy-and-hold markets. We very much emphasize our own internal research on stocks, and when we buy something, we tend to stay with it. There aren’t many derivative markets there (such as futures, to use as a portfolio hedge), so you can’t get out of these markets quickly.
Q: Plus, these still are small markets in terms of number of stocks and market value, correct?
A: Yes, but some of the markets have practically exploded in size in recent years, such as Thailand and Indonesia. Indonesia went from 24 stocks at the beginning of 1989 to 150 at the end of 1990, and from just under $1 billion in capitalization to $10 billion or $30 billion, depending on how you look at it.
Q: Why the disparity in the size estimate?
A: Because you may have 100 million shares issued in a market, but only one-third may be listed on the exchange.
Q: The rest are in private hands?
A: Right.
Q: As the markets have grown, have Asian firms gotten better about financial disclosure, so investors know what they’re buying?
A: It varies. In Singapore, they are fairly rigid on disclosure. But in Indonesia, a prospectus (for a new stock offering) still is the exception rather than the rule. You really have to do your own homework.
Q: How many stocks do you own? And mention some of the names.
A: Across the board, we have something like 100 companies. That would include stocks such as China Light & Power, Hong Kong Electric, Siam Cement in Thailand and OCBC bank in Singapore.
Q: Let’s talk about accessibility of these markets. How much easier is it to trade than a few years ago?
A: It varies. Hong Kong is completely open. Taiwan is still extremely constrained. In Thailand, every company has a foreign ownership limit. But two years ago, you needed Thai central bank approval to do anything. Last year, they freed-up transactions under $500,000. Now, they’re going to make it a completely free market.
Q: How about performance expectations? Many Asian markets tripled or quadrupled in the 1980s. What do you expect to earn in the ‘90s versus, say, returns on U.S. stocks?
A: I definitely see better returns than in the industrialized nations. Something in excess of 10% (annualized) would be our target. I see slowing economic growth but also lower interest rates. You also have the local demand factor.
Q: That brings up the issue of Asian economies’ growing dependence on each other, and less on exports to America. Can intra-Asian growth offset slower exports to an anemic U.S. economy?
A: Well, a lot of people are talking about that. However, it’s been our contention that a lot of intra-Asian trade is the result of multinational companies moving (parts) around Asia but with the end product still destined for export out of Asia.
Q: So short term, the United States will definitely be a drag on Asia?
A: Yes. But looking out 10 years, there’s no question that U.S. consumers will account for only half of the current 25% to 33% of Asian exports they now take.
Just look at China. In Guangdong province (adjacent to Hong Kong), you have a middle class of 40 million to 50 million people who can afford to buy goods.
Q: OK. Taking a long-term view, what are your favorite markets?
A: I still like Hong Kong. There’s only one reason to buy Hong Kong, and that’s China. I see good growth for Hong Kong companies as they exploit Chinese profit opportunities. But I also think you’ll see a persistent ‘China discount’ in Hong Kong shares (because of concerns over China’s 1997 takeover).
Q: What else?
A: Thailand has good prospects. The military coup (of March) was actually very favorable. You’ve had three years of double-digit economic growth in Thailand, but the infrastructure wasn’t being built up because of political infighting. Now, they are very keen to earn (investors’) respect.
Our holdings there include Thai President Foods, a noodle company that serves domestic consumption, and Thanulux, a clothing maker also mainly for domestic consumption.
I think Indonesia has the makings of a great economy. It has the resource base. The market hasn’t recovered as well as some others because of very tight monetary policy, but it’s now looking better.
We’re positive on Singapore because we’re positive on Indonesia and Malaysia, and Singapore is their financial center. Financial services industries there are growing at twice the rate of the general economy. We also like it because it had sold down so heavily in 1990.
Q: How about Malaysia?
A: We continue to like its prospects. Malaysia really has restructured its economy over last six years away from dependence on oil in terms of domestic export. They also have a lot of interesting companies that are domestic infrastructure beneficiaries--such as Cima, a cement company, and United Engineers, which is building a North-South highway.
Q: Which markets do you like least?
A: South Korea is undergoing short-term growing pains. Their labor rates are going up. They’ve lost direction (in the economy).
In Australia, they are still dealing with long-term problems--high wages relative to Asia, falling natural resources prices and an over-dependence on consumption.
Q: Small investors can’t place money with you. So how should they invest in these markets?
A: There are some very good closed-end funds (that target specific countries). But I would never buy closed-end fund stocks at premiums to asset values. Wait for a discount. Be diversified, and be a buy-and-holder.
Q: It’s tough to be patient.
A: There’s a very large Hong Kong investor I know who has had two portfolios: a blue chip, long-term portfolio and a trading portfolio. He told me recently that his blue chip portfolio has earned 30% annually over the last three years.
He admits that his trading portfolio, however, is just flat where it started. And this is a man who has had some very good trading advice.
* STOCK, FUND TABLES: D2
EMERGING ASIAN MARKET FUNDS These funds, which invest in stocks of specific countries, offer a simple way for average investors to buy into emerging Asian markets. The NAV is a fund’s net asset value per share. A fund’s stock price can fluctuate above or below the value of its holdings.
52-week Fri. Stock Fund high/low close NAV* vs. NAV Indonesia Fund 16 1/2-8 7/8 10 3/8 10 5/8 -2.4% Jakarta Growth 14 1/2-6 1/8 7 7/8 8 1/2 -7.3% Korea Fund 24 1/2-11 3/8 14 1/2 10 5/8 +36.5% Malaysia Fund 18-9 7/8 14 1/4 14 1/8 +0.9% R.O.C. Taiwan 11 7/8-5 5/8 11 1/8 10 7/8 +2.3% Singapore Fund 12 1/8-7 3/4 10 11 5/8 -14.0% Taiwan Fund 29-14 23 7/8 21 5/8 +10.4% Thai Capital Fund 12 5/8-6 1/8 9 1/2 10 7/8 -12.6% Thai Fund 25 3/4-14 18 3/8 18 3/8 --
*net asset value per share, rounded to nearest eighth.
All trade on New York Stock Exchange.
