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Special Report

GLOBAL INVESTING

It took a while to happen, but what started with a financial collapse in Asia has become a global stock market implosion. High tech, banks, blue-chip manufacturers, and more are being swept away by a wave of pessimism. This year's Special Report on Global Investing offers some strategies to follow. Even if Asia doesn't recover soon (below), are there defensive stocks you should hang on to if you want to keep investing worldwide? Will the euro provide some support for Europe (page 70)? And will the bloodbath in Latin American stocks (page 72) choke off the region's recovery?Return to top

ASIA: NO SIGN OF THE BOTTOM

A year ago, it looked as if the worst of the crisis was over. But global investors are still running for the exits

First came denial. Then the gnawing realization that Asia's currency crisis last year was more than a passing squall. Now, Asia's mess is becoming an economic tragedy. South Korea, Indonesia, Thailand, and Malaysia are in free fall. In Hong Kong, monetary authorities have tried unsuccessfully to rig the stock market by using as much as $15 billion of taxpayers' money to ward off speculators. And Japan's political paralysis, crippled banks, and stock market meltdown are the stuff of central banker panic attacks.

Fund managers winging in from New York or London to prowl Asia have known for months that the situation was bad. Ditto for global investors who have ripped open their Pacific Rim mutual-fund statements lately. In the 18 months ended July 31, investors pulled about $3 billion out of the 80 regional funds Morningstar Inc. tracks. It's easy to see why. Diversified Pacific funds tumbled at a 27% annual rate in the period. Those heavily weighted in markets outside Japan crashed 40%. Figures for August aren't in yet, but indications are the fund redemptions continued as markets plunged.

The general consensus among money managers a year ago was that the worst would be over by the end of 1998. Now, no one has any idea where the bottom may lie. Sure, managers say, there are extremely promising companies in Asia. And, yes, there are bargains among Japan's elite multinationals. But few are willing to back up those views with cash. "If you want to bottom-fish in the big blue chips, take your time--and prepare to take a three-year view," says David K. Thomas, co-manager of the $430 million Putnam Asia Pacific Growth Fund, which is down 22% this year.ONLY FOR THE BRAVE. Indeed, fund managers interviewed for BUSINESS WEEK's annual Global Investing Special Report are nearly unanimous: It's tough to argue in favor of buying anywhere in Asia until the ruckus calms down. If you are intrepid enough to plunge in to the gloom, you're best off sticking to companies with plenty of cash, clean balance sheets, and a unique technology edge or product.

But even such strong companies will suffer. And weakened companies in such smaller markets as Indonesia, Malaysia, and Thailand now seem to have little chance of making any comeback soon. Malaysian Prime Minister Mahathir Mohamad's move on Sept. 1 to impose restrictions on foreigners converting ringgit into dollars or other currencies will only dampen investors' sentiments further--especially if other countries mimic the action. "We are very bearish on Southeast Asia," says Thomas, who started shunning such markets a year ago.

In the coming year, investing in Asia will be like playing three-dimensional chess. What started out as a regional ailment in Asia has metastasized into a broader emerging-market cancer. Global investors are now so skittish that just about any bad news--whether a debt default in Russia or rumors of a Venezuelan devaluation--boomerangs back to Asia and deepens its crisis. The failure of traditional economic remedies promoted by the International Monetary Fund is a big drag, too. Hiking interest rates to defend currencies, wholesale corporate restructuring, more disclosure, and less government meddling haven't done the trick. Most Asian countries are now in full crisis-management mode. And some of the emergency measures are anathema to the free-market purists often found running big mutual funds.

Valuing stocks is next to impossible as some markets begin to look like a rigged game. In Malaysia, where the economy contracted 6.8% in the second quarter, Mahathir is now spending public money to boost the stock market and cutting reserve requirements on debt-laden banks. If Japan's experience is any guide, the money will be wasted. Tokyo has spent billions in "price-keeping operations" to bolster stocks, but the Nikkei is now 65% below its 1989 peak.SHOTGUN MERGERS. Huge salvage operations for the region's banks are also under way. Indonesia, South Korea, Thailand, and Japan are grappling with how to remove as much as $1.4 trillion in dud loans from banks without detonating a financial panic. But the problem keeps eluding solution. In Seoul, the government has shut five banks but has also pushed others into shotgun mergers. That makes buying bank stocks a crap-shoot. "You could be owning a strong bank today, and tomorrow the government will impose a weaker bank on you," says Stewart Kim, chief investment strategist at Pacific General Partners in Los Angeles.

Nowhere is the confusion more palpable, nor the stakes higher, than in Japan. Prime Minister Keizo Obuchi's ruling Liberal Democratic Party and the opposition parties led by Naoto Kan are locked in a game of brinkmanship over a bank bailout plan. Obuchi argues that any sudden failure of a money-center bank could spark a panic that would make the current turmoil seem minor. That's why he wants to pump up to $7 billion into the ailing Long-Term Credit Bank of Japan Ltd. and transfer most of its $19.8 billion in bad loans to a workout vehicle before merging it with the Sumitomo Trust & Banking Co.BLUE-CHIP BETS. Maybe saving LTCB, with $190 billion in assets, makes sense as it has $350 billion in derivative contracts with banks worldwide. But Tokyo is months away from dealing with the rest. By Sept. 1, such uncertainty had driven the Nikkei stock average down to 14,369, close to a 12-year low. That further weakened banks, which include their vast shareholdings in their capital. Nor is there confidence that the government knows the true scale of bad debts, estimated at $600 billion to $1 trillion.

But even in its weakened state, Japan is still Asia's most powerful economy. So investors betting on an eventual recovery are probably best off sticking with a regional fund that has Japanese exposure. The $33 million 59 Wall Street Pacific Basin Equity Fund focuses on multinationals that could benefit from a weaker yen, such as Nintendo, chipmaker Rohm, and Orix, Japan's largest equipment-leasing company. "We think the companies with the best earnings prospects are in Japan," figures manager Paul Fraker, whose fund is down only 1.4% for the year.

Other crisis plays involve companies with a near-monopoly in an industry segment or significant exposure to Europe, where an economic expansion is still under way. Olympus Optical Co., up 60% in yen terms this year, boastS both. It has a commanding 70% of the market for endoscopes, medical diagnostic equipment, and about one-quarter of its global sales come from Europe. Another favorite is Softbank Corp., a software distributor that owns the Ziff-Davis magazine publishing empire and the Comdex high-tech trade shows. Thanks to some $4 billion in unrealized gains on its internet investments in the search engine Yahoo! Inc. and online trading, its stock could appreciate 25% more, from $43 now, figures Mahendra Negi, an analyst with Merrill Lynch & Co. in Tokyo.

What to avoid? Just about every broker, bank, orheavily leveraged player in construction and real estate. Corporate bankruptcies are running at record levels and probably will accelerate as weaker banks continue to call in loans. What's more, investors have few means to distinguish winners from losers. Obuchi won't release new government audits of Japan's 19 major commercial banks. "We're dancing at the edge of a cliff," says ING Barings analyst James Fiorillo.

The same can be said about Hong Kong, the region's second-biggest stock market. The market's reputation has been damaged by all the official efforts to prop it up. When the Hong Kong Monetary Authority first intervened on Aug. 14, it pushed up the Hang Seng index from its five-year low. But once the news of turmoil in Russia surfaced, Hong Kong was caught in the undertow and abandoned intervention. On Sept. 1, Standard & Poor's Corp. (like BUSINESS WEEK, a unit of The McGraw-Hill Companies) downgraded Hong Kong's foreign-currency debt a notch, to A. Now, analysts think that even at 7,800, the Hang Seng Index is probably overvalued by about 20%, given the 50% bust in property prices since last year. Sooner or later, analysts expect, the market will fall close to 6,000.SEOUL'S SURVIVORS. The news from South Korea is even grimmer. One in 10 listed companies has defaulted this year. Even the savviest financial hand has trouble figuring out who might be next, thanks to opaque accounting practices. Worse yet, the government canceled its auction of bankrupt Kia Motors Corp. Sept. 1, with Ford Motor Co. and Korean bidders pressing Seoul and Kia's banks to take a huge hit on the carmaker's $7.4 billion in bad debts. Another auction is set for October. In the meantime, Pacific General's Kim thinks he has found some survivors. One is Dae Duck Industrial Co., a maker of circuit boards with supply contracts with Toshiba Corp. and Siemens. Its stock is up 7.8% this year. It has few debts and about $36 million in cash. Pohang Iron & Steel Co., the world's lowest-cost producer, is on most buy lists as cheap exports rise.

Yet few count on South Korea to make an easy transition to a more market-driven economy. GDP shrank 6.6% in the second quarter, and with unemployment running a record 7.6%, President Kim Dae Jung is under big pressure to back down from the radical corporate restructuring and industrial downsizing the economy desperately needs.

Labor unions seem willing to risk confronting riot police to avoid deep Job cuts, as they successfully did with Hyundai Motor Corp. In early August during a standoff at the company's auto complex in Ulsan. And instead of shutting or selling off unprofitable units, the big chaebol industrial combines continue to expand. Despite an auto capacity glut, Hyundai, Samsung, and Daewoo have recently raised a total of $4.5 billion through bond issues so they could bid in the international auction for Kia and truckmaker Asia Motors.

Any way you cut it, the crisis carries a harsh lesson. Asia's work ethic and vast savings couldn't compensate for the region's sloppy lending, government meddling, and corruption once the boom went bust. Global investors bolted--and it may be a long time before they come knocking again.By Brian Bremner in Tokyo, with Mark Clifford in Hong Kong, Moon Ilwahn in Seoul, and Lawrence Strauss in New YorkReturn to top


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