• Home
• /
• Business

Themes and strategy in Asian stock markets

The Turkey Fund (TKF) soared from 4 to 20. National Bank of Pakistan's IPO, recommended strongly in this column, rose 800 per cent in three years and OGDCL, also profiled here, has trebled in value.

The bull market in India was a pipedream to the world when I alerted investors to the extraordinary values available below Sensex 3,000. I caught the commodities rally that propelled Australian stocks and the Aussie dollar to historic highs.

Soon after the fall of Baghdad, I outlined the bullish case for the Far East in successive columns. After all, how can any rational investor ignore the worlds most populous, productive and high growth region? Asian mergers, Indonesia, bank shares, Japan and Thailand are now my favourite themes in the Asian stock markets.

Take mergers, for instance. Japan will soon remove laws against stock swaps with foreign firms. This means merger mania is as certain this spring as the cherry blossoms on Mount Fuji. With cash hoards on their balance sheet at historic highs, Japanese companies will merge to goose growth.

The Sankyo-Daiichi merger will create a Japanese Big Pharma. The Mitsubishi Tokyo Financial — UFJ will create the world’s biggest bank. The Fuji Television Nippon Broadcasting bidding war has electrified Japanese media. A higher dollar, foreign buyers and financial engineering lifts the Nikkei to 15,000 by year end, so I continue to hold the Japan index fund JWH, an ETF that trades on Amex.

The Indonesia Fund (IF on Amex) has been a winner for me since last year so I was thrilled by Moody's sovereign upgrade. Sure, Jakarta is still five levels below investment grade (same as Pakistan, incidentally!) but General Yudhoyono's election as President of Indonesia inaugurates an economic reform programme unique in Southeast Asia. Indonesia has slashed Suharto's disastrous foreign debt and Chinese flight capital has begun to return home.

Indonesia's stock market, excuse the awful pun, will take off not with a whimper but a Bambang. IF has doubled from 3 to 6 since May 2004. I bet it doubles again. In Asian banking, Standard Chartered Bank seems undervalued in the financial markets. Wall Street is sceptical that CEO Mervyn Davis overpaid for Korea First Bank in a bidding war with HSBC.

After all, Standard Chartered paid top dollar for Grindley's and bought the Hong Kong credit card portfolio of J.P. Morgan just before the former Brit Crown Colony sank into recession. Yes, Standard Chartered has a history of blowups in its emerging market franchises, from the Harshad Mehta scandal in Bombay to successive South African gold losses.

However, Standard Chartered has positioned itself as the largest foreign bank in Thailand, India and Indonesia. It is Asia's leading mortgage lender and the second in credit cards. It has a dominant presence in Hong Kong's retail market and is leveraged to the fast growing economies of the Arabian Gulf.

Standard Chartered has bought more Asian banking assets since 1999 than Citi or HSBC. With $200 billion in assets and almost 1,000 branches in four dozen countries, Standard Chartered Bank is an emerging markets crown jewel, a unique prize for an international bank without a strong Asian franchise such as J P Morgan, Bank of America or even Deutsche Bank. You just cannot ignore this last banking relic of the Victorian British Raj even though it trades at a premium to European bank shares.

My recommendations to buy the Thai Capital Fund on the NYSE last October were a winner. Thai shares are the most undervalued in the Far East and Prime Minister Thaksin Shinwatra's election victory has reactivated foreign interest in the Bangkok stock market. The tsunami was a human tragedy but it will not derail Thailand's 6 per cent GDP growth. The SET index in Thailand was the worst performing Asian stock market last year after Mainland China. In 2005, a liquidity boom will make Bangkok a winner.

Thailand's elections were a turning point in its history because Thaksin is now the first leader in Bangkok to have won a second term of office. With four out of five seats in Parliament now controlled by Thaksin's populist Thai Rak Thai party, a landslide mandate means the economic reform momentum will continue.

Ironically, Thaksin's victory vindicates his much maligned Thaksinomics and his anti- IMF stance during the Asian currency crisis. Thailand's baht meltdown was the result of a botched devaluation, the withdrawal of Western hot money, real estate overbuilding and a regional crisis of confidence, not any structural weakness.

The Bangkok SET index has trebled from its lows during the depths of the crisis. The kingdom has resumed its 6-8 per cent Southeast Asian GDP growth model. Thaksin's fiscal populism has also ignited the rural economy that had stagnated under the ancient regime of Prime Minister Chuan Leekpai. With its modest valuation multiples, Thailand has tremendous upside potential in 2005.

Any visitor to Bangkok can literally view Thailand boom. The skeletal office towers of 1997 (projects abandoned by bankrupt real estate developers) are now new malls. The traffic is as toxic and impossible as ever. But the offshore bulls are coming back to Thailand. Foreigners have been net buyers since January and Calpers will return after a three year absence. Think about it. Bangkok trades at a mere 12 times earnings while Manila, with a Moody's downgrade and rebellion in Mindinao, trades at a much higher 15X. Sure, Muslim unrest in Pattani, the Thai banking systems bad loans and a rise in rural household debt haunts Bangkok.

As emerging market darlings like India, Brazil and Mexico reach higher valuation multiples, Thailand is cheap and unloved. No problem. Bull markets are born from doubt, not excessive optimism.