Will CalPERS Kill Asia's Rally?


By Bruce Einhorn In his line of work, Hugh Young has become accustomed to bucking trends. The Singapore-based director for Aberdeen Asset Management runs about $250 million in equity investments in Southeast Asia, a region that has been languishing in obscurity for years. Its stock markets have been in the doldrums since the great Asian financial crisis walloped them in 1997. Back then, currencies collapsed, bourses tanked, and most foreign investors fled. Young and Aberdeen stuck around, however, and now have 15% of their Asian (excluding Japan) money in the region.

In the first few weeks of 2002, it seemed that Young might be getting some company. Southeast Asia's markets staged impressive rallies as investors bet that countries like the Philippines, Thailand, Malaysia, and Indonesia might have lots of bargains (see BW Asian edition, 3/4/02, "This Rally Might Just Be for Real"). Most encouraging of all, foreign investors were making their way tentatively back to the region. "We've had a jolly good run," says Young.

Alas, the party may be over. Southeast Asian markets may have just caught a case of Enron flu. On Feb. 20, the largest U.S. pension fund, the California Public Employees' Retirement System (CalPERS), announced that it was pulling out of the public equities markets in Thailand, Indonesia, Malaysia, and the Philippines. Thailand's market dropped 6.7% on Thursday and

Friday, Feb. 21 and 22, the first two days after the CalPERS news hit. The Philippines and Malaysia fell 3.9% and 1.7%, respectively, over the same two-day period. After finishing nearly flat on Thursday, the Indonesian bourse was closed on Friday.

FAILING FOURSOME. CalPERs has long had a bent toward socially responsible investing and advocacy for shareholder rights. Early on in the Enron scandal, the fund tried to block any Enron directors from joining the board of any company that wound up taking over the crippled energy giant.

CalPERS made its move in Southeast Asia after evaluating all of the emerging markets in which it invested and measuring their liquidity and transparency, as well as labor standards and political stability. Of the 16 countries spanning Latin America, Central Europe, the Middle East, Northeast Asia, and Southeast Asia, CalPERS decided that only four countries didn't make the grade -- the four in Southeast Asia.

The big worry for investors isn't the loss of CalPERS' cash. The fund had only $200 million or so in Malaysian stocks and much smaller holdings in Thailand, Indonesia, and the Philippines. The real problem is that its move may set a precedent for other U.S. pension funds. "My concern is people not buying as a result" of the CalPERS announcement, says Young. "They might say that we were thinking about buying these markets, but now we will defer our decision."

"HUGE INFLOWS." Ironically, foreign investors had finally been starting to make their way back to these markets. Consider Thailand. In the first two months of 2002, the country has attracted a net inflow of $300 million, more than double the paltry $115 million the country attracted in all of 2001. Other countries in the region have seen similar increases. "There have been huge equity inflows in the last few weeks," says Sameer Goel, a Singapore-based currency analyst for Bank of America.

Goel points to the spreads on Philippine bonds as another good sign. Today, the

difference between Manila's government bonds and U.S. Treasuries is 459 basis

points, he says, vs. 690 last fall. The narrowing difference reflects increased investor confidence. Says Goel: "There's much less of a risk premium being priced into these bonds."

Will the region be able to keep that hard-won confidence in the wake of the new blow delivered by CalPERS? After all, the California fund has a reputation for being a leader in the fight for corporate transparency and minority-shareholder rights. If CalPERS says Southeast Asia doesn't win its seal of approval, regional leaders who have struggled to convince foreign investors that governments and companies are growing more responsible are probably going to find that the job much harder.

HYPOCRITICAL? That's especially annoying to Vasant Chatikavanij, executive vice-president of the family-run, Bangkok-based conglomerate Loxley Public Co. A Princeton-educated Thai, he accuses CalPERS and other like-minded Americans of hypocrisy. "Double standards are being imposed by outside investors," says Vasant, who points to the Enron case. Americans "have been preaching to us about corporate governance," he fumes. "With Enron, you are talking not just about bad disclosure but fraud, yet you come and preach to us about disclosure and transparency."

Vasant also questions CalPERS' motives in using labor standards as one of its criteria. "I've lived half my life in the U.S. and half my life here," he says. "I want our workers to be treated the same way [as in America]. But if you do that, the company can't survive. We would love for [Thai] workers to have California standards, but if we did that, would we be competitive? Would anybody buy our products?"

Of course, it's possible that other investors will ignore CalPERS and continue their slow return to Southeast Asia. But even an optimist like Sriyan Pietersz, head of research for SG Securities in Bangkok, has to concede that the situation is not great. Yes, market volume in the Thai baht has recovered to precrisis levels. But when measured in U.S. dollars, volume is still down, since the baht has lost half of its value since the crisis started.

And SG itself is retrenching in the region. It recently shut its offices in the Philippines, Malaysia, and Indonesia. The move "was dictated by the practical realities of the markets," he sighs. With CalPERS' latest move, the picture may be getting grimmer. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online


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