Investors in dilemma

HONG KONG: Asian investor sentiment has soured with the spread of SARS, sending portfolio managers scurrying to cash despite cheap stocks across the region. "Asia is cheap but I don"t think that is a catalyst to buy when sentiment is so weak," said Khiem Do, head of Asian equities at Baring Asset Management (Asia) Ltd.

Investors are trapped between the downside risks posed by Severe Acute Respiratory Syndrome (SARS) and the opportunity to buy cheap stocks. Many regional airlines, property, banking, tourism and retail stocks been hit hard by the outbreak, but Asian stocks are still trading at near all-time lows and offer investors some of the highest dividend yields in the world.

JP Morgan estimates Asia Pacific markets outside of Japan will trade at a price-earnings ratio of 12.3 times in 2003 against 17 times of the U.S. and 15.4 times of the European markets. But instead of selling the value story, investment banks are slashing regional growth forecasts and revising down earnings estimates as governments from Singapore to Hong Kong grapple with the spread of the killer virus.

"Clearly, the SARS has complicated the matters since Asia was supposed to be the growth engine of the world this year," said Raymond Foo, regional strategist at BNP Paribas Peregrine Securities. ING Financial Markets, which is overweight on financials, real estate and technology, said it had lowered its estimate of 2003 regional earnings growth to between six and eight percent from 12.8 percent because of the impact of SARS.

Such pessimism has cast a pall over Asia and many analysts are now wondering if the region"s stock markets can outperform their U.S. and European counterparts, as they have done in the past few years.

The benchmark Morgan Stanley Capital International (MSCI) Asia Pacific Free ex-Japan Index has underperformed global benchmark indices, losing about 4.6 percent so far this year against a 3.6 percent gain on the Standard & Poor"s 500 index and a 0.6 percent drop on the FTSE 100 index.

The advantage of SARS

Adrian Mowat, Asian strategist at JPMorgan Securities, said that Asia appears to be losing its relative economic momentum just as confidence in a U.S. recovery is increasing. "We need to see the economic and earnings downgrades feeding through before Asia starts to recover its relative performance," said Mowat. "One advantage of SARS is that it allows analysts to dramatically reduce numbers while saving face."

The investment bank is overweight on Taiwan, Malaysia and Indonesia. It expects Asia to outperform in the second half of the year, helped by good economic growth and improving profitability.

Analysts say Asia"s cheap valuations, high dividend yields and flush liquidity, combined with the end of the Iraq war and an expected pick-up in regional exports, should provide a backdrop for stocks to bounce back if the spread of the SARS is contained.

JPMorgan says the prospective dividend yield for Asia Pacific markets outside of Japan could reach four percent in 2003 versus 2.2 percent in the U.S. and 3.4 percent in Europe. Fund managers say once SARS starts to fade, investors are going to focus on market fundamentals and that"s when Asia"s strengths are going to stand out.

A Hong Kong-based head of Asian investment working for a foreign fund that manages about US$2.0 billion in the region outside of Japan said that with U.S. rates unlikely to rise any time soon, investors will have to look elsewhere for yield. "There"s only one place in the world where I am going to get it and that"s Asia," he said.

© Reuters