Asia Recovery?

Henry C.K. Liu hliu at mindspring.com
Wed Apr 14 22:22:30 PDT 1999


14 Apr 1999 Singapore Business Times

Look out for Nikkei hitting 20,000 this year

Japan looks set to be the classic turnaround story of 1999

By Chua Soon Huat

[SINGAPORE]

In mid-November last year, when Japan's benchmark Nikkei 225 index was trading at around the 14,000 level, I called for the Nikkei to rise to 18,000. I am now revising my call. The Nikkei will hit at least 20,000 before the year is out -- based on market dynamics, the effects of current and forthcoming economic policies, the sheer momentum of restructuring and an important mindset change.

Market dynamics

The powerful effects of wealth creation are in not only the Nikkei, but more importantly, the OTC (or over the counter) markets; and specifically the Jasdaq (the Japanese equivalent of the US Nasdaq), which is already up about 60 per cent this year.

This has put much money into the pockets of domestic players, especially Japanese entrepreneurs and individual investors. It has also provided much-needed positive reinforcement in the growth industries related to the Internet, multimedia, telecommunications, financial services and, in general, investor psychology.

As one interesting signal of this turnaround in sentiment, the prices of golf club memberships have risen over the last three to four months, after years of decline. This indicator is arguably one of the best in capturing the forthcoming mood change towards asset prices in Japan -- given that it's said to be male-dominated, and golf-crazy.

Elsewhere, Japanese banks, which were predicted to register huge portfolio losses, have instead had the pleasant surprise of a much-better-than-expected financial year-end valuation for their stock portfolios at the end of March.

Coupled with the actual injection of 7.5 trillion yen (S$107.3 billion) in public funds, Japanese banks' capital bases have significantly strengthened. Over time, this will result in a buoyant loan market in a more optimistic environment.

The extremely bearish view in the related Japan government bond market suggested by many analysts has proven to be ill-placed. The steep yield curve and the well-timed easing by the Bank of Japan -- which has brought down the cost of short-term yen borrowings to near zero per cent -- have stabilised the market. This has also contributed to much-healthier-than-expected bond portfolios for Japanese institutional investors.

Such market dynamics can be expected to continue, making Japan the classic turnaround story of 1999, despite broad-based scepticism among economists. The recent foreign buying of Nikkei is only the first wave of buying by "smart-money". More's on the way.

Economic policies

The positive effects of the aggressive and consistent economic policies adopted over the last six months by Japanese Prime Minister Keizo Obuchi are surfacing and will bear fruit. The implementation of much-needed personal and corporate tax cuts, plus cuts in real-estate capital gains taxes, have been well-received. These can only enhance Japan's competitiveness, boost entrepreneurship and promote wealth creation.

Given the recent debate and fear that Japan will soon need another huge fiscal stimulus package, some are anxious about the effect this might have on Japan's overall budget deficit. But I believe that if -- instead of focusing on fiscal stimulus -- the next package zooms in on boosting private-sector dynamism via strong tax incentives, the Nikkei will react very positively.

In particular, I favour the idea of tax holidays for new ventures in the areas of multimedia, software, IT-education, communications, and loan securitisation. This will help absorb the retrenched labour from the current ongoing restructuring and cost-cutting by Corporate Japan.

Restructuring and a change in mindset

Corporate Japan's recent announcements on restructuring and cost-cutting are a reflection of a mindset change that could lead to tremendous value to shareholders, if follow-through actions are carried out effectively.

For example, productivity and profitability will soar as fat is eliminated, and powerful motivational performance measures which align management, employee and shareholder interests are put in place. More and more firms are implementing these measures, which include sales and revenue targets, share option schemes and performance-based bonuses.

In the best-case scenario, banks who are in the money business will benefit tremendously from the activation of the world's largest pool of money: US$10 trillion (S$17.2 trillion) in domestic savings. At the same time, Japanese Internet-based and other high-tech related industries will benefit from strong global growth trends for a knowledge-based global economy.

Even the battered real estate market could begin a decent recovery as sake starts to flow, and the cherry blossoms bloom.

The author is chief strategist, Sanwa Bank ***************************************************

9 Apr 1999

Investor confidence returning to Asia

A survey of analysts in the region reveals a big positive swing in overall optimism. LOUIS BECKERLING looks at the survey's main findings

The investment mood in Asia has taken a positive turn over the past quarter, but caution remains the watchword.

This seems to be the central message captured in the "Asian Barometer", a survey of financial analysts in Singapore, Hongkong and Malaysia.

The poll of investment professionals is sponsored by Societe Generale Asset Management (Singapore) Ltd, and conducted by research company Taylor Nelson Sofres Malaysia.

In Singapore this week, SG Asset manager Laurent Bertiau said it was evident from the survey results that the sense of crisis which had occupied analysts in November was passing.

"If you look at the November survey we were still in a mindset of crisis. But since then we have seen interest rates stabilising, currencies stabilising, and some countries embarking on a restructuring of their finance and banking sectors," he said. In this respect the first "macro" stage of the Asian recovery was complete, added Mr Bertiau. But yet to run its course at a "micro" level -- through to the year 2000 -- were improvements in corporate earnings and cash-flows.

The top dangers which remain, judging from survey responses, include a significant fall in the US Dow Jones Index -- ranked by 86 per cent of respondents as "fairly likely or likely" -- and a rise in US interest rates (ranked by 81 per cent as fairly likely or likely). The survey also uncovers deep concern over China's growth rate slowing (ranked by 86 per cent as fairly likely or likely), and consumer demand in the US and Europe falling (ranked by 83 per cent as fairly likely or likely).

The message that emerges for retail punters?

The collective wisdom of the experts polled by the survey suggests that it is safest to stick with blue chips for the moment, particularly given the danger of an asset-price bubble bursting in the US, concerns that China's growth rate may be faltering, and that Japan's recovery may not even get underway.

Though the respondents don't get down to picking stocks, they were asked to identify which sector of the Singapore market was likely to show upside potential over the second quarter of the year. Top of the list was the electronics sector, followed by banks, property, and conglomerates.

A summary of the survey's main findings

A total of 150 respondents (61 financial analysts and 89 fund managers) were interviewed, spread more or less evenly across Hongkong, Kuala Lumpur and Singapore. A summary of their responses:

Economic issues:

A big positive swing to overall optimism, with 72 per cent of all respondents -- from 47 per cent polled in November last year -- saying they were now either "very optimistic" or "fairly optimistic" about the current economic situation in their countries. There was a corresponding sharp fall in the overall number of "pessimists" -- from 53 per cent to 25 per cent. But the aggregate outcome masked a less pronounced swing shown by Hongkong respondents, just 57 per cent of whom joined the optimists, versus 51 per cent in November.

And elsewhere in the survey deep pessimism emerged over the time-frame for Indonesia's economic recovery, with 68 per cent of respondents saying a "return to an environment of steady growth" would take "longer than three years".

The biggest vote of confidence went to Singapore's economic recovery, with 70 per cent saying steady growth would be restored "within the next 12-18 months". Asset mix

Equities won the vote as the best investment in the current environment from 68 per cent of respondents, versus 52 per cent previously; with bonds getting 19 per cent of preferences, against 34 per cent previously.

Support for equities was most pronounced among Kuala Lumpur respondents -- 79 per cent of whom voted for equities as the best investment option, versus 62 per cent previously; followed by a 65 per cent vote for equities from Hongkong respondents against 40 per cent previously. Among Singaporean respondents there remained strong support for bonds -- 24 per cent support, versus 25 per cent previously.

Interest rates

A strong view emerged that the sharp retreat of interest rates was at an end, with 70 per cent of respondents predicting a "stable" interest rate regime over the next three months, versus just 24 per cent previously; while just 27 per cent anticipated a continuing trend of falling rates, versus 75 per cent taking this view in November.

However, when asked to take a view over the next six months, 40 per cent of respondents anticipated falling interest rates (61 per cent previously), versus 45 per cent who foresaw stable rates (33 per cent previously).

Share prices

Hongkong: Forty-seven per cent of respondents said Hongkong share prices were now fairly valued compared to 41 per cent previously, though the number who felt that Hongkong share prices were still over-valued remained high at 30 per cent, versus 38 per cent previously.

Singapore: An almost identical percentage of all analysts called the Singapore market fairly valued at present prices (46 per cent versus 44 per cent previously), though a smaller percentage (19 per cent versus 25 per cent previously) said Singapore share prices were over-valued.

Kuala Lumpur: Just 15 per cent of respondents said Malaysian shares were now over-valued versus 22 per cent previously; while 22 per cent described Malaysian shares as under-valued, versus 29 per cent previously; and 33 per cent opted for fairly valued, versus 18 per cent previously.

In sharp contrast to Hongkong analysts, many of whom thought their own market was over-valued, KL analysts were the biggest bulls on their own market, with 33 per cent calling it under-valued, compared with just 6 per cent of Hongkong analysts who said KL shares were under-valued and 29 per cent of Singapore analysts.

Sectors & stocks

Blue chips get the analysts' vote, and small and mid-cap stocks remain well out of favour, with 88 per cent saying the current environment is most favourable to blue chip investments, and just 8 per cent giving small and mid-cap stocks their vote. The judgment is more or less consistent across markets. Based on a one-year horizon the sector most favoured across all the markets was finance/banking (42 per cent), followed by technology (28 per cent), and electronics (24 per cent). Heavily out of favour were industrial products, construction and trading/service companies.

Within the region the analysts polled favour Japan above Korea and then Thailand as offering the greatest upside potential in the coming quarter. Outside of the region the US market gets the nod as offering the greatest upside potential over the next three months (a puzzling outcome given the real fears expressed of a collapse in US share prices). In line for net investment inflows are markets in Japan, South Korea, and Bangkok; while net outflows appear to be on the cards for Hongkong and Jakarta.

Currencies

Currencies most likely to appreciate in the judgment of respondents are the South Korean won, the Australian dollar, and the Thai baht, while the candidates for further depreciation are led by the Japanese yen, the Indonesian rupiah and the Singapore dollar.

***************************************************

TOKYO

Japanese jobless rate seen at 5% by mid-2000

Cabinet ministers express concern about excessive restructuring

JAPAN'S jobless rate -- once the envy of other industrial nations -- is expected to climb to over 5 per cent from its current record high of 4.6 per cent by mid-2000, a Reuters poll of economists showed yesterday.

A cascade of restructuring announcements from companies eager to slash excess capacity and a Japanese economy still in recession have convinced most analysts that growing unemployment is inevitable.

The jobless rate is expected to reach 5.1 per cent in the April-June quarter next year, according to an average of forecasts from 17 research institutions. The poll was conducted between April 5 and 8.

The government has acknowledged that unemployment is on a rising trend, with Economic Planning Agency Minister Taichi Sakaiya saying it could reach 5.2 per cent but declining to predict when.

Though not near the double-digit figures of some European countries, Japan's unemployment level contrasts painfully with a US jobless rate that has worked its way lower in recent years to stand at 4.2 per cent in February.

Japan's 4.6 per cent unemployment rate for February compares with 3.6 per cent a year earlier and levels of around 2 per cent in the early 1990s.

The likelihood of further rises has prompted a chorus of concern from cabinet ministers, who have warned firms against excessive restructuring and extolled the virtues of Japan's postwar tradition of lifetime employment.

Company announcements so far indicate that this round of restructuring, while more painful than past efforts, will still be done Japanese-style -- avoiding large-scale layoffs.

Job cuts are expected to be made through early retirement, curbs on new hiring and shifting workers to affiliated companies or setting up internal divisions as separate firms, methods still worrying for workers but which attempt to cushion the blow as much as possible.

A 29-year-old designer whose division will be spun off into an independent firm said: "Some, especially the older ones, do see it as the slow road to being let go, but most of us are trying to look on the bright side, to see it as an opportunity."

He added: "Of course, I'm psychologically prepared to jump ship if need be. I think we all are."

Even Sony Corp, whose trailblazing restructuring plans helped cheer Tokyo stocks last month, said its intended 17,000 job cuts would take place over four years, coming mainly through natural attrition and being spread globally. -- Reuters

"Henry C.K. Liu" wrote:


> Pump-priming fails to lift Asia's sickly giant
>
> By a staff reporter
>
> THE world's second biggest economy and Asia's giant is still in a sickly
> state, according to key reports issued in Tokyo.
>
> Japanese government agencies suggested that the bottom of the recession
> had finally been reached, but outside economists said that there were
> still factors that could drag Japan down again _ and with it the rest of
> Asia.
>
> The Bank of Japan and the Economic Planning Agency (EPA) both reported
> that the combination of heavy spending of hundreds of billions of US
> dollars on public works and the reduction of interest rates to near-zero
> had managed to prop up the economy. But they were not prepared to
> predict yet that they could see the recovery.
>
> Politicians tried to put a brave face on the reports. ``The pent-up
> demand is awakening,'' said Prime Minister Keizo Obuchi, but he then
> admitted: ``Of course, employment conditions and capital investment
> continue to be severe.''
>
> The tortured prose of the EPA showed a lack of confidence: ``Although
> the economy continues to be in an exceedingly severe condition as
> private demand is weak, it is gradually bottoming out of the downtrend,
> supported by a series of policy initiatives.''
>
> The Bank of Japan's assessment was more straightforward. ``Japan's
> economy, at present, appears to have stopped deteriorating,'' said the
> central bank in its monthly report. But it warned: ``Corporate profits
> remain weak and employment and household income conditions continue to
> deteriorate.''
>
> Sceptical economists are not convinced that the corner has yet been
> turned. Reuters asked 36 economists for their predictions for the
> financial year that started this month, and got an average forecast of a
> further fall of 0.7 per cent in growth _ much more pessimistic than the
> positive growth of 0.5 per cent that the government has projected.
>
> Individual forecasts ranged from a 3.2 per cent rise to a 2.3 per cent
> fall, but only two economists predicted growth, five said the economy
> would remain flat and 29 suggested a further shrinking on top of
> negative growth for five successive quarters.
>
> The problem is that Japan's economy is trapped in an intricate but ugly
> web. Although the government has spent massively on public works _
> US$300 billion (HK$2,340 billion) last year alone _ these have not had a
> decisive impact.
>
> In particular, consumer confidence remains low. On the streets of Tokyo,
> the people look as well-fed and well-dressed as ever, but the
> free-spending by government has not inspired them to part with their
> money.
> Indeed, poor growth has made them more uncertain.
>
> By the autumn the effects of the spending packages will have worn off.
>
> Politicians are resisting calls for a fresh package. Finance Minister
> Kiichi Miyazawa this week repeated his assertion that there was no need
> for a new stimulus.
>
> Unemployment has risen to a post-war record 4.6 per cent and is likely
> to rise higher and thus dampen consumer spending even further, push
> profits lower, with the risk that Japan will be sucked into a whirlpool
> of recession.



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