P&I: Nilly, what are your views?
MS. SIKORSKY: I am personally a bit gloomy on the region of the Pacific Basin. It seems to me that, like all emerging markets, Asia/Pacific needs direct investments and the biggest investor in the region was Japan.
But, with the yen back from 80 to 115, maybe 120, it is unlikely this massive direct investment will continue and, therefore, the profits there are pretty questionable. The currency is more linked to the dollar than to the yen in the region and exports have a very strong multiplying factor.
On emerging markets, I think we would feel more comfortable in Latin America and we look a lot at India and Russia.
P&I: Alan, what do you see?
MR. MCFARLANE: I think it has been a year where people have been reminded that Asia ex-Japan is not a homogeneous region where you make one asset allocation decision and then go to sleep. The difference in performance between Hong Kong and Thailand is 60% through the end of October. And I think also people have been reminded that these countries individually have their own monetary policy, their own exporting pattern, their own distribution of economic activity and so on. Crucially, people have been reminded of the role that politics can play in Indonesia, Thailand, Korea.
I guess the paradox has been the fact that Hong Kong has performed very well and that is fine. Our argument has been that we do not know what happens after July 1 next year save one thing, that the political discount on stocks no longer need apply. Therefore, the logic of a p/e discount relative to, say, Singapore seems to be less evident. So we continue to find that an attractive area.
We think the underlying growth potential in Hong Kong is good. One area where we have an assumption that is untestable other than by the passage of time is we think it unlikely the Chinese authorities want to lose any face whatsoever, having said goodbye to the British, and they will want Hong Kong to continue to be a success and be seen to be a success for some time to come. They are the biggest investors there, and have a big interest in the market being well supported.
So, with respect to the region, all the charts we look at suggest the region is at the low end of its valuation range. We do see some of the major global brokerage houses recommending on a value basis a move into those markets, and if you were selling U.S. equities today to buy Asia ex-Japan equities, I think you are getting 150 on the dollar compared to 85 at the end of 1993.
So, there is a case for some sort of recovery, but we think it is going to have to be very selective. Our view is the opportunities there remain, very much on a stock-selective basis.
In Latin America, Brazil has performed very well but others have not been so successful. We had the finance minister, the governor of the Central Bank of Venezuela in the U.K. a few weeks ago talking about their facing reality - as Tony mentioned the French and Italians have not - and there were new laws passed in Bolivia to deal with their deficit and pension problems. Whether that is enough of a basis to invest in the companies locally, we have a worry about that.
P&I: Dick, your thoughts?
MR. SNIJDERS: We think the bad performance of the markets in the Far East outside Japan was very much related in 1995-'96 to the cycle in the electronics and intercircuit business.
With the positive picture we have for the remainder of 1996-'97 in that area, we think that with the increased development of world trade we will see a recovery in the Far East but, as was said before me, with a lot of differences from country to country.
P&I: Dean?
MR. BUCKLEY: What happened last year is that investors got a fairly sharp reminder that these are essentially specific economies, and we saw GDP growth fall back from 8% to 6% and the way that affected profits was that earnings growth went from 20 to zero.
In terms of valuation, though, p/e ratios are now back to the levels we saw in the late '80s. So the growth premium for Southeast Asia has all but disappeared. We think there is value beginning to emerge. We have a neutral view on the region, but we are very positive on Hong Kong.
It is pretty clear that both the Chinese and Hong Kong economies bottomed in the first half of this year and we have seen quite a strong recovery since. The property market has improved a lot in Hong Kong, particularly the residential property market, and we are seeing upward revisions through earnings forecasts. We expect those to be revised upward through to about 15% for next year. So, given our view on the rest of the world markets, we think Hong Kong has one of the best outlooks available today.
On emerging markets, we are staying with the bets we have had in place for most of this year, the most aggressive of which is that we are short South Africa. The country tried to defend a structurally weak rand with higher interest rates. At the same time, the economy has been pretty weak.
P&I: Finally, Tony?
MR. THOMSON: I am not directly involved in our emerging markets business, so maybe I can tackle this conceptually as regards to what happened this year or what will happen next year.
Ultimately, earnings growth is somehow related to the growth of the general economy and I suspect these regions will continue to grow a good deal faster than the industrialized world. I think if you look particularly in Europe at pension needs, you have to ask yourself: How many real growth companies are there in Western Europe? Can you count them without taking your shoes off? It is pretty close.
P&I: I thank you all.
