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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