MS. SIKORSKY: We have very firm views on Japan in our organization. I think it is the mirror image of the United States. It is doing what the Americans did in the late '50s and early '60s, which was to build capacity outside of their own country.
This means that, eventually, they will be delivering goods to foreign clients from this capacity and no longer exporting. In many ways, really, it is very similar to the U.S. when the U.S. peaked, and I think Japan peaked in 1990 or the early 1990s.
You really have enormous structural problems that you have to find solutions to - the demographic problem, the lack of political consensus problem, etc. But on a short-term basis, and even on the long-term basis, you cannot have a zero option in Japan.
P&I: Allan, your thoughts?
MR. MCKENZIE: We are overweighted in Japan. To pick up Tony's point, they have addressed a lot of the problems they essentially ignored for a long, long time. They are actually letting companies go bankrupt.
In terms of the economy, we see the economy beginning to pick up. We see the outlook for Japanese growth next year being more positive. There will be a better flow of news coming through on the economy. But as to who is actually going to buy the market, that is the big question. I think a lot of the foreign investors who were early in, perhaps in the middle of 1995, have become stale, and the locals are certainly not turning their attention toward the equity markets but rather picking up 21/2% on Japanese bonds and overseas bonds.
It is only when the local institutions actually turn back toward Japan and they see there is a sufficiently good flow of news on the economy, that the market will begin to come. We think the market is probably going to trade in a box and you are not going to make a huge amount, maybe 10% or 15%.
MR. THOMSON: I think the Japanese will buy Japanese equities. If you look at what their people, for example, have been doing, they are shifting money away from the trust banks and the insurance companies.
The 5-3-3-2 rule is coming off next spring; book/cost accounting is coming off. All of these things are going to attempt to push Japanese institutions with enormous unfunded pension fund liabilities toward the equity market. Will it happen today or tomorrow? I have not the faintest idea. But there are interesting opportunities.
P&I: If we can move on very quickly to the Pacific Basin. What went wrong this year and how are things shaping up for next year? Let's tackle emerging markets at the same time.
MR. MCKENZIE: In terms of the Pacific Basin, I think many of the authorities in the Pacific area have grasped the nettle on inflation and have imposed a monetary policy that had the effect of gaining control over inflation, particularly China, where over the last two or three years inflation was pretty rampant.
That really put a downward pressure on inflation and I think that was one of the contributory factors. Obviously, what happened in the global electronics market was pertinent to countries like Singapore.
And there also has been the deterioration in external accounts of many countries in the region, due to the lack of growth coming through from Europe globally and also within the region itself. Obviously, they are still growing at 5%, 6%, 7% in the region, yet the momentum has deteriorated.
So that created a background that was not quite so favorable as it has been in the past. Of course, the other factor was that the U.S. market was going through the roof and I guess U.S. money was not pouring out as fast as it was at the end of 1993. It was really just a crazy situation.
P&I: What is your outlook for next year?
MR. MCKENZIE: We are probably past the worst. The China factor, I think, has turned more positive. They have turned the tap on and the economy there will grow and that will benefit Hong Kong. We see Malaysia and Indonesia still as being attractive on a stock-picking basis.
We think Singapore has problems and in Thailand there are certain parallels, I think, with Japan in terms of problems in the property market and the lack of political leadership. There is just a total loss of confidence in the market, and I believe the election result was probably not the one the market was looking for. (Contd.)