Q & A / Ean Wah Chin : Currencies and Politics Keys to Asian
International Herald Tribune
February 14, 1998
Conrad de Aenlle

EAN WAH CHIN is the chairman responsible for institutional investment in Asia, excluding Japan, for Morgan Stanley, Dean Witter, Discover & Co.'s Morgan Stanley Asset Management. She spoke with Conrad de Aenlle on the risks and potential rewards of Asian stock markets. - Q. Last summer, few market professionals were warning of the collapse to come. Now, with some markets having just traded at 10 cents on the dollar, compared with their peaks a few years ago, only a few brave souls are willing to step up and send in their money. What are they waiting for? A. For the effects of the devastation in the stock and currency markets to work their way through the real economy. Massive layoffs and corporate bankruptcies and social and political upheavals lie ahead. The dislocation is too big to be rectified in the short term. The readjustment is likely to take a couple of years rather than months. Some of the necessary reform is beginning to be put in place. One would be tempted to say that the worst in the markets is over, but there could be another leg down if Indonesia suffers a political upset or if the U.S. market cracks. Q. Many advisers caution against stepping back into Asia before there are clear signs of an economic turnaround, but markets usually anticipate economic circumstances. What signals are you looking for to confirm that a bottom is in place? A. Currency stabilization and smooth political transition in Thailand, the Philippines, Indonesia and maybe even Malaysia. Indonesia has got to crack sometime on the political side. If you look around the region, the most chance for upset is in Indonesia. Thailand, in effect, has already had the transition and is showing signs that the new administration is beginning to function. In Malaysia, everyone knows who is No. 2. The question is, when does the old man go and pass on the mantle? [Deputy Prime Minister Anwar Ibrahim is widely regarded as the successor to Prime Minister Mahathir bin Mohamad.] Q. Which markets seem the safest in the region and which offer prospects for the best returns over the next year? A. Singapore, Taiwan and Hong Kong seem the safest, and Thailand, Indonesia, Malaysia and the Philippines offer the best potential returns. We are not necessarily saying to invest in those markets, but when you see a real turn, you should invest in the most bombed-out markets. If you are bullish, you should invest in the markets with the most potential. Q. Market sentiment is incredibly weak. It only took a couple of weeks for Korea watchers to throw up their hands and say that the multiyear International Monetary Fund bailout plan is not working. Are the IMF plans in Indonesia, Korea and Thailand working, and what will be their short- and long-term impact? A. The short-term impact will be tremendous economic pain from the liquidity crunch. The long-term impact will be a sounder foundation for economic growth and a more transparent system. Q. Will this crisis result in lasting reform where Asia needs it most, such as eliminating cronyism, excessive regulation and other forms of government economic engineering? A. Largely, yes. The crisis has brought to the surface the economic price of cronyism and has provided the grounds to challenge it. The old structure is broken. The crisis has highlighted the economic price of excessive regulation, but it has also engendered nationalistic and protectionist tendencies. The chaebol structure in Korea is in the process of being broken for good, but it does not lessen government desire to be more in control of their markets and economy. In effect, the economic devastation caused by the market turmoil has precipitated a call to regulate money flows and the financial markets. Have governments lost their zeal for regulation? No. Q. Morgan Stanley's analysts say that one outcome of the crisis is that stock-picking will take precedence over country allocation. Why? A. Stock-picking is going to be crucial in identifying the winners in this changing paradigm. Fundamental analysis is essential to quantify value and identify the survivors. Country allocation, however, is also key in ensuring that one is not overtaken by the changing macroeconomic circumstances in the economic and political upheavals. Investors who are anxious to reenter the market cite the extremely low valuations. At its depths, Cathay Pacific sold for less than the value of its planes — that is, if you could find a buyer for them. Is that a sound basis on which to buy? Absolute valuation is important, but the picture is not static; one has to be conversant with the changes taking place. Stock prices are market valuations for an ongoing business. The value of planes alone does not determine the ongoing value of Cathay Pacific.

Copyright © 2006 the International Herald Tribune