QUARTERLY STOCK MUTUAL FUND REVIEW : While Other Asian Markets Falter, Japanese Stocks Have a New Surge

By RUSS WILES

April 4, 1994 12 AM PT

RUSS WILES, <i> a financial writer for the Arizona Republic, specializes in mutual funds</i>

Aircraft carriers and supertankers can’t turn on a dime, but stock markets can, judging from the way Asia-oriented mutual funds have been behaving lately.

Last year, Asian stock markets outside of Japan were riding a crest of popularity. Prices doubled in Hong Kong, the Philippines, Malaysia and Indonesia, and nearly did so in Thailand, Taiwan and Singapore.

Now, those markets are sprouting leaks, having been swamped by a tidal wave of bad news from the United States and China. Stocks in Hong Kong, Thailand and Malaysia have lost roughly a quarter of their value since the year began.

Adding to the irony is that Japanese stocks, which got left at the dock in last year’s fourth quarter, have mostly been steaming ahead this year. Though they have faltered the past two weeks, pure-Japan stock mutual funds still rose 17.3%, on average, in the first quarter--the best performance of any fund category, according to Lipper Analytical Services.

Japan’s stock market was one of the few beacons during a dismal first quarter around the globe.

By contrast, Pacific region stock funds, some of which have Japanese holdings but many of which are geared to smaller Asian markets, tumbled 11.5% for the quarter, on average.

In part, these turnabouts can be explained by a dose of sanity returning to world financial circles. No investments can keep doubling in price, so stocks in Hong Kong and the other Southeast Asian markets were due for a period of digestion, if not indigestion.

And stocks previously may have dropped too severely in Japan, notwithstanding that country’s uncommonly weak economy and tumultuous politics. The top-performing Japanese stock fund in the first quarter, the DFA Japan Small-Company fund, was up 28.44%, making it the biggest winner among all stock funds.

But that fund had been the worst stock fund of the fourth quarter, when it fell 23.93%.

And over the past four years, of course, Japanese stocks have been in a deep bear market, and they remain off 50% from their 1989 peaks.

Now, “what you have is a country with low interest rates in deep recession, with a government that’s using strong fiscal policy to move the economy up,” says Walter Frank, chief investment officer for Donoghue’s Moneyletter newsletter in Ashland, Mass. “That’s the recipe for a rising economy and stock market.”

It also helps that the yen has been rising against the dollar, boosting the value of Japanese stocks from the standpoint of American investors.

Between a tax cut and government spending on infrastructure, the Japanese government’s stimulus package is worth an impressive $135 billion, says William Wendler, vice president of Rowe Price-Fleming International, which manages the international funds of Baltimore-based T. Rowe Price Associates.

Although Wendler sees the Japanese market’s two-year outlook as promising, his firm isn’t convinced that Japan has emerged from its recession just yet.

The T. Rowe Price International Stock Fund has just a 22% stake in Japan, even though Japanese shares account for 44% of the total value of all non-U.S. companies.

One dilemma facing investors is whether Japanese stocks, which had risen to excessive levels in the late 1980s, remain overpriced even today. The market’s price-to-earnings ratio stands around 80, roughly where it peaked in 1988.

“The key difference is that the world economy was facing a recession back then, while it’s looking at a recovery today,” says Wendler.

Other valuation measures, such as dividend yields and the price-book ratio, show the Japanese market to be more reasonably priced, analysts say.

At any rate, Frank believes Japan is too important to ignore and recommends that growth-oriented Americans allocate 10% to 15% of their stock holdings to the market, including what they might already have in Japan through broadly diversified international funds.

The problems facing investors in Hong Kong and other Southeast Asian markets are quite different from those for Japan. These smaller economies have been expanding rapidly in recent years, buoyed by increased trade with China and the West.

Yet the danger that Washington may revoke China’s preferential trading status within the next two months has spooked the Hong Kong market in particular.

Such a move would curtail trade and lop 2% from Hong Kong’s economic output, estimates Chen Zhao, managing editor of the China Analyst, a newsletter from the Montreal-based Bank Credit Analyst Research Group.

Also, rising American interest rates are being felt in Hong Kong, because the currency of the British colony is linked to the U.S. dollar. A third concern for investors is the poor health of Deng Xiaoping, China’s market-reform leader.

“If all three of these dangers happen at once, the Hong Kong market will go down the tubes” despite already steep losses, says Zhao, who calls the next three months critical.

Otherwise, Southeast Asia’s investment potential remains sound, he says. Singapore, Malaysia and Thailand, among other Pacific economies, are expected to grow at much faster rates than mature Western economies over the next decade.

So, for investors owning shares in Pacific region stock funds--or wanting to buy--the key is to view these volatile markets solely as long-term plays.

“It doesn’t do any good to chase after last quarter’s top performers” while bailing out of the worst funds, warns Neil Burns, a broker and certified financial planner at LPL Financial Services in Mission Viejo.

He recommends that growth-oriented investors maintain up to 12% of their portfolios in emerging-markets funds, of which Southeast Asian stocks are a core.

Wendler, too, is clearly optimistic about the future of the Pacific region.

“Near term, the markets will be choppy, but long term this is still our favorite part of the world,” he says.

Asian Connections

If you already own a broadly diversified international or global mutual fund, chances are you have some exposure to Japan and the other Pacific Region markets such as Hong Kong, Malaysia, Singapore and Thailand.

The following list shows the degree to which various fund groups are oriented to Asia. Note that the smattering of pure Japanese funds are lumped into the Pacific group.

Fund Category: Global funds

Investment Focus: Hold stocks from anywhere in the world, including the United States.

Current Weightings

Europe: 33%

U.S.: 32%

Pacific: 14%

Japan: 13%

Latin America: 4%

Other: 4%

Fund Category: International funds

Investment Focus: Hold stocks from anywhere in the world, excluding the United States

Current Weightings