Institutional investors started tiptoeing back into the Hong Kong market Friday after last week's roller coaster ride.
And more are poised to jump in there and possibly elsewhere in Asia if markets settle down.
Interest in Asian markets is high, said Mark W. Headley, managing director, Matthews International Funds, San Francisco, and co-manager of the Matthews Pacific Tiger Fund. A conference call last Thursday with 57 professional investment advisers generated many questions on markets and when to re-enter.
"There is a lot of money (waiting for) the right time" to be put into Asia, Mr. Headley said. "People are trying to get their questions answered. And I think money is going to move into Asia, not all at once, but mostly when markets show signs of bottoming and signs of a sustainable rise . . ."
Others, however, are sitting on the sidelines, waiting to see whether the Hong Kong dollar will maintain its peg at $7.80 to the U.S. dollar and whether rising interest rates will cripple the Hong Kong economy.
But last week's 22% slide in Hong Kong stock prices - including a 10.4% drop Oct. 23 - clearly sent chills down investors' spines. And the damage might not be over.
While the Hong Kong market recovered 6.9% on Friday, the U.S. equity market continued its decline, with the Dow Jones industrial average closing down 132.36 at 7715.41.
The dramatic market movements clearly reveal investors around the world are extremely jittery about high valuations in global equity markets, and it takes relatively little to send stock prices into a global slide.
Problems unique, investors say
But sanity appeared to return to some markets Oct. 24, as investors decided Hong Kong's problems were unique.
Peter Dencik, managing director of Singer & Friedlander International Asset Management, London, said it would have been different had the U.S. market plunged to the same extent.
"I think this should be perceived as a Hong Kong problem rather than anything else," he said.
Andrew Preston, director, Murray Johnstone International Ltd., Glasgow, Scotland, said Hong Kong's fundamentals are sounder than in other Southeast Asian countries that have been hit by currency speculators, such as Malaysia, Indonesia and the Phillipines.
The Hong Kong Monetary Authority was determined to keep the currency peg in place, he noted. The key will be for the au thority to get interest rates down to a reasonable level, he said.
As a result, Murray Johnstone has started buying Hong Kong stocks. "We've been looking around, in fact, to pick up bargains as they become available,"
Mr. Preston said. The firm is buying "blue chips, good stocks that have been really hammered during the past few days. We picked up stocks like Cheung Kong (Holdings Ltd.)," a property and investment company.
Similarly, Global Asset Management Ltd., London, started buying Hong Kong stocks on Friday for its regional portfolios.
In its global portfolios, however, the manager had cut an overweight position of 8% at the end of September to less than 5% in October, said David Duncan, investment director of GAM's institutional division.
Some wait for lower prices
Others are close to buying, especially if stock prices cheapen further.
Gary Greenberg, chief investment officer, Peregrine Asset Management (Hong Kong), might do some buying of Hong Kong shares as early as next week, if conditions look right.
"Valuations on Hong Kong companies are very cheap - just about at historical lows; the market is trading about 10 times 1997 earnings. Some of the biggest companies have taken big drops and are really quite attractive, such as Hutchinson Whampoa (Ltd.), HSBC (Holdings P.L.C.), Cheung Kong."
Mr. Greenberg said he'd consider buying if the Hang Seng index got down to 9,000 or if interest rates come down sharply, as he expects. The Hang Seng closed at 11144.34 Friday.
Simon Key, chief investment officer at Framlington Investment Management Ltd., London, said, "Hong Kong stocks are a reasonably good value, and we probably will consider increasing the weight. We will hang in to see if we get another bout of weakness before we commit again."
Others, however, want to wait and see.
Nigel J. Webber, managing director, Crosby Asset Management, Hong Kong, said, "We are not yet buying (in Hong Kong). We are still hanging in there and watching but not buying, because the uncertainty of whether the dollar 'peg' (the Hong Kong dollar value to the U.S. dollar) can hold."
While there's only a 10% chance it will not survive over the next few weeks, Mr. Webber predicts it will "definitely not survive over the next five years."
Pension fund uses derivatives
The 26.5 billion guilder ($13.3 billion) Stichting Bedrijfspensioenfonds voor de Metaalnijverheid, Rijswijk, the Netherlands, used derivatives to somewhat reduce its underweight exposure to Hong Kong stocks.
"We were buying some futures and selling some puts" in Hong Kong, said Hans Rademaker, manager of treasury department for the Dutch fund for the Metalworking, Pipe, Mechanical and Automotive Trades. The fund applies overlays to make tactical shifts without disturbing underlying stock portfolios.
But Mr. Rademaker said the fund intends to maintain its underweight position.
Others remain negative on Hong Kong.
Arnout van Rijn, portfolio manager at Robeco Group, Rotterdam, the Netherlands, thinks the Hong Kong dollar "will be defended by high interest rates," which may lead to some further falls in stock prices.
Ashok Shah, senior portfolio manager with Old Mutual International Asset Managers (UK) Ltd., London, said the firm's Asian portfolios are close to the 10% ceiling in cash.
"One should be extremely cautious," Mr. Shah said.
Two days before the sharp fall in the Hong Kong market, Mr. Shah said the firm hedged three-fourths of its portfolios out of the Hong Kong dollar and other emerging Asian assets and back into home currencies.
Mr. Shah said real interest rates in Hong Kong actually had been negative during the past decade. "That created intensive speculation in the real estate market and everywhere else because, effectively, money was very cheap."
Decisions look like mistakes
But if Hong Kong is entering an era of positive real interest rates, many investment decisions made in the past "look like a mistake all of a sudden," he added.
Whether the peg remains or is altered will spell difficult times for Hong Kong, Mr. Shah said. High interest rates would stifle the economy, but the cost of maintaining the peg could lead the domestic population to move assets offshore, he said.
Regardless of what the government and speculators do, ultimately it will be in the hands of Hong Kong Chinese to determine the fate of the currency, he said.
Keith Brown, chief investment officer, WorldInvest Ltd., London, doesn't think the worst is over.
"I think there will be more pressure and more attacks on the Hong Kong dollar .*.*. with devaluations in the rest of Asia."
"The boom time for Asia was when the dollar was weak," Mr. Brown said. These countries "haven't given sufficient emphasis to improving productivity."
Right time for rest of Asia?
Still, some investors think the time is ripe to re-enter other Asian markets.
In recent weeks, State Street Global Advisors, Boston, has been doing some buying in the markets of the Philippines, Thailand, Korea, and "to some degree, Malaysia" although it's still underweight there, said Brad Aham, assistant vice president.
Said John Chisholm, portfolio manager at Acadian Asset Management, Boston: "Among the emerging markets, one Asian market we (have some) interest in right now is the Philippines. Although it had a difficult year, it's one where we are finding some very cheap securities right now. We have in the last couple of days added to our position in the Philippines."
Mr. Webber, of Crosby Asset Management, likes Singapore's market and three months ago was actively switching to exposure there from Hong Kong and China.
"We had already reduced Thailand, Malaysia and Indonesia to almost zero in our Asian portfolios, which was a great call at the time. We went to Singapore." Singapore is now about 25% of the Asian portfolios, up from about 10% at the beginning of the year. Hong Kong is now about 35%, down from as much as 45% at the beginning of the year.
U.S. managers not worried
Despite the U.S. stock market's copycat reaction to Hong Kong's slide, managers of U.S. equities are calm.
O. Thomas Barry, senior executive vice president and director-investments at George D. Bjurman & Associates Inc., Los Angeles, said, "This is definitely a buying opportunity in U.S. stocks. The problems in Hong Kong will have no impact or little impact on the U.S. The drop of 10% in Hong Kong overnight could be the climax of the fall in the Southeast Asian markets."
Mike Wolf is executive vice president and senior portfolio manager, American Express Asset Management Group, Minneapolis. Said Mr. Wolf: "I think we're still in a bull market" in the United States.
"When you have gains so unprecedented in the last few years as we have, you'd expect a correction once in awhile. I'm surprised we've had so few. The fundamentals (of the market and economy) haven't changed."