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Even before the Sept. 11
terrorist attacks on the U.S., many Asian nest eggs
had grown appreciably smaller. Here's what you need to
know about managing what's left of your wealth in a
changed world
In a swing around Asia last week, David Hale felt he
had been transported back in time. "Stocks here
are really so cheap now," marvels the chief
global economist and strategist for Zurich Financial
Group in Chicago. "I feel I'm back in my youth as
I look at companies selling at price-earning ratios of
five or six times, and with dividend yields of 8%.
Those are valuations I used to see 20 years ago. For
stock pickers and long-term investors, Asia looks like
heaven right now."
But it's still hell for many local punters. When
ASIAWEEK asked some of the region's high-profile
investors what they'd do with $100,000, few said they
would buy stocks. Financial adviser Marc Faber opted
for Afghan rugs (see story page 34). Dotcom
millionaire Antony Yip would invest in Shanghai
property. Hong Kong socialite Shirley Hiranand would
buy a flat in London. Ordinary investors are also
tuning out. "I've learned my lesson," says
Hong Kong engineer Leon Wong, 30, who is reeling from
the 54% fall in Chinese computer maker Legend since he
bought the stock in May. He believes terrorism will
keep the markets depressed for years. "From now
on, it's the bank for my money," he says.
That's a mistake. Equities are still the way to go in
building long-term wealth. Cash, bonds, property and
art do have a place in a diversified portfolio. But
the piles of any financial house should still be
driven into a bedrock of equities. Historically,
stocks return significantly higher yields over long
periods compared with any other asset. There are times
of excess — remember the Internet bubble? — and
steep sell-offs. But if you hang on to a well-chosen
basket of shares long enough, you're guaranteed more
money in capital gains and dividends. "The
markets," says Dio Wong, regional analyst at
Merrill Lynch in Hong Kong, "always revert to the
mean."
Last week, the Dow Jones Industrial Average returned
to its pre-Sept. 11 level of 9,600 points, having
clawed back the more than $1 trillion in investor
wealth that was wiped from the boards in the week
after terrorist attacks on New York and Washington.
The market gave back some of those gains after an
American Airlines Airbus A300 crashed in New York on
Nov. 12, but quickly recovered when the government
said it believed the tragedy was due to mechanical
failure, not terrorism. By market close on Nov. 13,
the Dow had risen to 9,750. Even the latest negative
numbers on the U.S. economy have not dented the new
optimism. At 5.4%, the U.S. unemployment rate is the
highest in 10 years. Consumer spending is also
grinding to a halt. "The markets are less
sensitive to bad news these days," says Norman
Chan, head of research at Hong Kong financial adviser
Allen Perkins.
That said, the Dow and Nasdaq, along with Asian
markets, are still way below their peaks last year,
when the U.S. economy seemed like it could expand
forever. But more terrorist attacks cannot be
discounted even though the war seems to be going
America's way as the Taliban abandoned one key bastion
after another last week. And no one should have any
illusions about a tidy end to the conflict. "If [
Osama bin Laden's] Al Qaeda gets hold of a nuclear
bomb and gets it into Washington or New York or San
Francisco," says Hale soberly, "you'll have
a real clash of civilizations."
So how, in a more frightening world, do you invest for
your children's college fund and your own retirement?
First, stop being flat-out scared. Adjust your
mind-set to simple prudence. The world has changed,
but it is not ending. "The global economy will
eventually recover, and people will get used to a
certain level of terrorism, like in the U.K. [under
the constant threat of IRA bombings]," says
Markus Rosgen of ING Barings in Hong Kong. "In
the long term, terrorism is not going to be a major
issue."
True, companies will need to spend more on physical
and I.T. security.Shipping and air travel expenses,
supply-chain costs and insurance premiums are also
rising. But these, by themselves, should not cause
blowouts in corporate budgets. Since every firm is
affected in one way or another, companies can pass on
the additional expenditures to consumers without fear
of getting undercut by competitors. The impact on
bottom lines should be neutral in the long run as
corporations and customers adjust to new pricing
realities.
What will almost certainly change is the way the
markets value stocks. "The vast majority of
investors today are fundamentally more cautious, less
aggressive and therefore more likely to look at
corporate fundamentals rather than chase Internet
stocks that have no business models," observes
Zurich Financial's Hale. The shares that will do well
are those with good dividend yields, reasonable
price-earnings ratios and substantial return on equity
and assets. In other words, everything old is new
again.
The panic selling of the past two months has thrown up
many of these gems. "Asia is the cheapest it has
been in nearly 20 years," says Ajay Kapur, Asia
strategist for Morgan Stanley in Hong Kong. "The
U.S. is probably 20% undervalued, while Asia is about
50% undervalued." The region's economies,
particularly Japan's, may be in tatters. "But
investors have to separate economies from corporates,"
says Kapur. "While nominal economic activity is
the worst in two decades, return on equity for Asian
companies is higher than nominal growth. That hasn't
happened in a long, long time."
Analysts say some of the region's corporations are
stronger today than they were before the Asian
financial meltdown four years ago. "Since the
1997 crisis, companies have been doing good things to
improve their infrastructure," says Mark Monson,
head of fund management at Switzerland's Gottardo
Asset Management. "Corporate Asia and central
banks have focused on streamlining their operations
and cutting off a lot of fat. Once external demand
picks up, Asia's export-driven markets will rebound
very quickly. I'm more confident about Asia now than I
was before Sept. 11."
What has not changed all that much are corporate
governance practices. This has implications for Asia's
long-term stock pickers, given the markets'
back-to-basics orientation. "Definitely, the
issue is being taken very seriously," says Robert
Wylie, Asia Pacific head of consultant Deloitte Touche
Tohmatsu's global strategic client program.
"Companies with good corporate structures in
place are much more likely to avert sharp downward
movements in earnings. They have mechanisms that allow
them to assess risk and predict the sources of risk
looking forward."
But by the same token, not all Asian blue chips that
look cheap today are a good buy. The days when the
markets automatically awarded premiums to politically
connected but opaquely run family and state-controlled
conglomerates are ending. "In times of excessive
growth, many [corporate governance] shortcomings are
covered up," says Alan Thompson, senior vice
president at U.S. consultant Stern Stewart. "This
crisis will unleash basic Darwinian forces. Global
capital will flow only to companies that are
transparent and which accord equal treatment to
majority and minority shareholders."
Many Asian conglomerates tend to pump large amounts of
capital into their operations. They do generate
earnings from every dollar, but the returns are often
lower than the cost of capital. On the surface, both
majority and minority owners take a hit. "But
there are other ways for big shareholders to take
returns," says Thompson. "They may sell the
assets of their privately owned companies to the
listed vehicle at inflated prices. They may pay
themselves fat salaries and bonuses as managers and
board members. They essentially turn gold into
lead."
Will they change? "We'll see a lot of corporate
restructuring in Asia in the next two years,"
predicts Thompson. It's all part of investing and
doing business in a world transformed by terrorism. In
these pages, we reveal what well-known investors and
celebrities in Asia would do with $100,000. You can
pick up investment pointers and get insights into
their thinking. Then read on — ASIAWEEK's investment
picks start on page 41 — for other ideas on how to
put your money to work in these interesting times.
By ASSIF SHAMEEN/SINGAPORE, and MARIA CHENG
andCHARLES S. LEE/HONG KONG
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