Money: The East

Rising investment star


Hong Kong—If the Asia-Pacific basin is the new frontier of investment opportunity—a proposition few would disagree with—then it is particularly so now. Throughout the region, from Hong Kong in the north to Australia in the south, securities markets are in a depressed state. Although Asian economies remain vibrant, worldwide recession and high US interest rates have had a temporarily negative impact.

Now, you may say that this doesn't sound like a very promising picture. Who wants to buy into a bear market? Not many, but who wouldn't buy in at the bottom of markets that have explosive long-term potential?

That is not to say that the bottom has been reached. It probably hasn't. But in the longer term, Singapore's booming property and financial sectors and Malaysia's rubber, tin, and other resources promise great things.

As for Hong Kong, the bloom appears to be off of the property speculation craze, which has always been the driving force behind the stock market. Real estate prices (and rents) continue to rise but at a much slower rate and, after discounting 15 percent inflation, are adjusting downward in real terms. Until lower US interest rates enable Hong Kong to follow suit, Hong Kong's four exchanges—soon to merge into one—are apt to remain weak.

But again, the longer-term picture is bright. The British colony's strong growth, high productivity, preeminence as a trading and financial center, and energetic development—all based on a laissez faire-oriented policy of low taxation and regulation—mean that Hong Kong shares have much higher to go.

Frank Heath, research director for Sun Hung Kai Securities, Hong Kong's largest broker, suggests looking at smaller property-based companies with good growth prospects and sound financial backing.

Australia is down under right now, but interest rate relief and a labor settlement should make it bounce right back up at some point. Australia is a virtual treasure house of resources, with reserves of coal,oil, gas, uranium, diamonds, and many other minerals that are only beginning to be tapped. Close to $10 billion in foreign capital is expected to flow into Australia in the coming year. Petroleum can only benefit from the resource development boom.

The important common denominator is that nearly every economy in the Asia-Pacific area, at least those with a free-market disposition, is enjoying fantastic economic growth, even in the face of current world financial and trade conditions. Hong Kong's economy has grown an average 11.3 percent over the past five years in real terms. This year, growth may end up only at 8-9 percent, but that's not too shabby. Singapore grew 10.2 percent and Malaysia 8 percent in 1980. The more mature economies of Japan and Australia are growing at a slower pace but still faster than those of Europe or North America.

The scary thing about markets in this part of the world is that they are incredibly volatile. This is due to the very fact that they are economic frontiers and are not dominated by institutional investors. The heavy degree of small, less- informed investor participation makes these markets more risky but at the same time more exciting. "Because the general level of knowledge is not as high as in a sophisticated market," notes Heath, "anyone that takes the trouble to do the research and do the work can gain an advantage, which is much harder to do in the States."

Another factor to consider is exchange rates. Right now and possibly for months to come, many Asian currencies are undervalued against the US dollar. This is certainly true of the Japanese yen and the Australian dollar. It is probably true to a lesser extent of the Singapore dollar. The Hong Kong dollar is more of a question mark. It could continue to drift lower, though not nearly enough to dent potential profits. In other words, in many cases, gains in shares or property could be compounded by currency gains.

How does one get involved? One way would be to open an account with a broker in the region. But unless you are prepared to leave trading decisions to his discretion, communication problems make that a bad choice for most people.

It is simple enough to trade through a US broker, though—preferably one with connections to a broker in the country you are interested in. Firms like Merrill Lynch and Bache have offices all over the world. Sun Hung Kai works with Bear-Stearns. Japanese brokers—Nomura, Yamaichi, Nikko, and Deiwa—operate their own US offices.

Then too, a number of Asian stocks are traded in ADR (American Depository Receipt) form in US dollars on the US market—for example, Broken Hill Proprietary of Australia, Japan's Hitachi, Toyota, and others.

Finally, and perhaps easiest, you can choose from among the unit trusts (mutual funds) that specialize in Asia- Pacific stocks. There are numerous ones managed and traded in Hong Kong, principally by Gartmore Fund Managers, G.T. Management, Jardine Fleming & Co., and Wardley. Examples are Jardine's JF Southeast Asia Trust, JF International Trust, and Jardine Eastern Trust; Wardley's Nikko Asia Fund and Japan Trust; Gartmore's Hong Kong and Pacific Unit Trust; and G.T. Management's G.T. Asia Fund.

These trusts are made up in different measure of Hong Kong, Singapore/ Malaysian, Philippine, Japanese, and Australian shares. Minimum investment is expressed in terms of units (shares), ranging from 200-500 units. The units trade on the Hong Kong (and sometimes London) stock markets and fluctuate up and down like any other shares. Sales and redemption fees and management fees are calculated into the bid-ask spread, which can go as high as 6 percent. However, the performance records of many funds can make the spread seem minuscule.

The US stock market may yet shake off its doubts about Reaganomics, get some interest-rate relief, and quit diddling with the Dow Jones 1000 mark. But in the meantime, to coin a cliche: Go East, young man.

Steven Beckner is a free-lance financial writer, the editor of Deaknews, and the author of The Hard Money Book.