The crises in Asia - from last week's military standoff with China, to the ultra-depressed state of the Japanese economy - have institutional investors worried about their investments in that region.
Some money managers are concerned about the long-term effect the Chinese crisis, in which the Chinese held 24 U.S. Navy personnel from a downed spy plane, would have on the country's relations with the United States and on China's being admitted to the World Trade Organization.
Another question mark, said Raymond Lin, portfolio manager for Asia at Sit/Kim International Investment Associates, Minneapolis, is President Bush's decision, expected next month, on whether to sell the Aegis anti-missile defense system to Taiwan. This is bitterly opposed by the Chinese.
If Mr. Bush capitulates to congressional hawks, who were emboldened by the spy plane incident, and sells Taiwan the system, relations between the U.S. and China could get frosty again, causing some investors to hold off on investments in China, according to Mr. Lin.
"If it does result in increased tensions between the two nations, it might cause some people to reconsider their investments in China," he said.
Eric Ritter, portfolio manager of the Driehaus Asia-Pacific Fund of Driehaus Capital Management Inc., Chicago, said, "You'll see investment decisions (in China) delayed until China finally gets into the WTO."
But Josh Rosenthal, senior vice president of Fiduciary Trust Co. International, New York, doesn't think there's long-term harm.
"Some people thought the (spy plane) incident was so damaging it would hurt trade relations with China, but we don't agree," he said. "If anything, this clarifies and highlights the increased importance of our trade with China." He pointed out that last year the United States exported $16 billion in goods to China and imported $100 billion in products from China.
Trouble in Japan
The heightened attention on China has been one problem concerning investors, but the moribund Japanese economy is another.
Mr. Rosenthal believes the severe economic problems in Japan are being exported to other countries in Asia, especially Korea, which is both a trading partner and competitor with Japan for export sales of technology products.
"Of the top 20 Korean export categories, they overlap with Japan's exports by 80%," said Mr. Rosenthal. "With the weakness of the yen causing Japan to charge less for its exported products, it has an effect on Korea," and forces its currency to fall as well.
"There are a bunch of economic issues involved in investing in Asia now," said Robert Maynard, chief investment officer of the Public Employees' Retirement System of Idaho, Boise. "The question of whether they're opportunities or dead money depends on the issue."
The $7 billion Idaho fund has about 6% of its total assets, and about 35% of its international investments in Asia.
"Japan is the cause of more concern than the rest of the region," he added. "The issue is not so much what the current situation is, but how much of it is accurately reflected in (stock) prices and what will happen going forward."
Although he is not calling his money managers daily to check on them, Mr. Maynard said the active managers his fund uses for the most part are underweighted in Japan "and equally weighted in the Pacific ex-Japan." Of course, he pointed out, "the farther you're down, the bigger the potential for a turnaround."
Driehaus' Mr. Ritter said the fall in value of the yen is a big problem. "The weakness in the yen is putting pressure on the rest of Asia," he said.
"If all the (Asian) countries devalue their currencies at the same time, Asia could be going back to the crisis of 1998. The currencies and (stock ) markets are getting close to the levels of 1998.
"People are pulling money out of these economies now because growth is slowing. Then they have to cut their prices; that's a long-term crisis for Asia," he added.
"It's hard to find bright spots in Japan," said Mr. Rosenthal. "It's hard to find a sector of the economy that's doing well. Japan has relied on the weakening yen to help its exports, but with economies around the world slowing down, that may not help."
At GE Asset Management Inc., Stamford, Conn., the focus is on finding good companies to invest in amid all the troubled companies in Japan and the rest of Asia.
"Our focus is to find good companies in Japan that have done well on a global basis," said Daizo Motoyoshi, portfolio manager in Tokyo for GE. He said GE is invested in Japanese companies including Sony Corp., Honda Motor Co., Ltd. and Canon Inc.
"We tend to focus more on companies rather than countries," he added. "There are companies in Japan that have been successful on a global basis for 10 to 20 years."
"We may not like Japan as a market, but we like the companies in our portfolio," said Mr. Motoyoshi.
Japanese investments make up about 12% of the portfolio the $88 billion GE pension fund has benchmarked to the Morgan Stanley Capital International Europe Australasia Far East index, according to Makoto Sumino, a portfolio manager with GE. GE Asset Management has about $2.5 billion invested in Asia, approximately 22% of the firm's $13 billion in international assets.
GE takes the same attitude toward other Asian countries, including Korea - look for good individual stocks amid the problem companies.
In Korea, Mr. Motoyoshi said GE has investments in Pohang Iron and Steel Co., a steel company, and Samsung Electronics, the semiconductor maker, both of which "are very undervalued."
"These companies work through cycles. I feel very comfortable with them going forward," he said.
Sticking with it
"We have not chosen to limit our managers' exposure to those companies," said John Krimmel, CIO of the State Universities Retirement System of Illinois, Champaign. "All of our international managers use Asia and the Pacific Basin as part of their opportunity set and we have a small emerging markets portfolio in our plan"
The emerging markets portfolio is about $250 million, or around 2% of the $12 billion pension fund. About 40% of the emerging markets allocation is invested in Asia.
But there are contrarians who say the markets have been beaten down so far they represent good buying opportunities.
Peter Rathjens, CIO at Arrowstreet Capital Inc., Boston, thinks Asian markets may be good investments now. "The Asian markets have already reflected the worst news and, on a relative basis, Asian markets look reasonably attractive," he said.
"Maybe Japan has gone down as far as it needs to, to reflect its problems, and there are buying opportunities," he added.
Mr. Rathjens said Japan's problems had spread to other Asian countries, noting the stock markets in Korea and Indonesia are down for the year.
However, he said, "On a diversified, long-term basis, these countries represent better buying opportunities than developed markets now."