Global tech warnings raise risks for Asian markets

By Nick Edwards

HONG KONG: Gloomy outlooks on computer sales from industry heavyweights Microsoft and IBM signal risks on the horizon for investors in Asia's technology-heavy equity markets, fund managers and strategists said on Friday. "The market had priced in a full-blown recovery based upon economic numbers that were coming out and corporate numbers suggested for the first quarter," Mark Konyn, Asia director for Dresdner RCM Global Investors in Hong Kong, told Reuters.

"These warnings are trying to re-set expectations because (the recovery) is not completely there yet," said Konyn, whose firm manages some $6 billion in the region. Microsoft Corporation on Thursday reported a 12 per cent rise in quarterly net profit, but weaker-than-expected sales and a cautious outlook that left investors scurrying for cover.

"Our expectations of (technology) spending and economic activity in general is more modest than the average analyst is assuming," Chief Financial Officer John Connors told Reuters when asked about the cautious expectations.

Investment bank economists have been ramping up forecasts for global economic growth this year, based mainly on expectations of higher technology spending in the United States. Microsoft's cautionary note was sounded just days after International Business Machines Corporation posted its sharpest drop in earnings since 1993, blaming its woes on lower technology spending by companies.

Grim full-year forecasts from Finland's Nokia kicked off the latest round of jitters about a global technology-led recovery, which came shortly after upbeat views from Motorola, Philips and Texas Instruments.

Worries about technology are especially acute in Asia, whose export-oriented economies are heavily dependent on the IT sector. Electronics on average make up between one third and one half of the region's total exports and as much as two thirds of exports from Malaysia and the Philippines, according to JPMorgan.

But Shane Oliver, head of investment strategy and chief economist of Henderson Global Investors -- which manages $149 billion worldwide -- said worries over technology were overdone. "Historically, it has been the case that the CEOs (chief executive officers) are not good at predicting the future," Oliver told a news conference on Friday, adding that tech firms had a rosy outlook in 2000, but the industry collapsed in 2001.

Oliver said that mixed signals were consistent with the bottoming of the economic cycle. Even if the recovery is smaller than anticipated, the fact of it happening at all is lifting Asian corporate earnings from their very low levels of last year.

"We're not arguing with the recovery, but a lot of what we saw in terms of the magnitude was due to one-off re-stocking, which suggests that that level of improvement is going to lose momentum quite quickly," Dresdner RCM's Konyn said. But as Asian tech stock valuations are below those of their global peers, it implies that relative value can still be found.

"At the moment the signals are very confusing because the outlook is very poor and I'm in the more bearish camp on the recovery, but the very, very sharp inventory rebuild has been quite pronounced in terms of the earnings cycle," Sean Darby, senior strategist at Nomura International, said. "It's probably a little bit early to be calling them an underweight at the moment, although I am much more worried about the third and the fourth quarter," Hong Kong-based Darby said.

Bright spots were evident in South Korea on Friday, where Samsung Electronics posted record first-quarter net profits. But global first quarter personal computer sales were sluggish and leading research firm Gartner Dataquest says the market outlook for 2002 remains highly uncertain.

That risk of uncertainty is one that markets in Asia have discounted too fully and too early for many fund managers who look at improving sales, but fret about stagnating profits. "Sales numbers have actually been reasonably good, but the profit numbers have not been," said Julian Mayo, managing director at iRegent Group, which manages about US$200 million of assets in the region.

"Nokia clearly has lost its pricing power, as has Microsoft, in many key areas. It's a question of whether some of their suppliers may be able to exert pricing power, but the fact that neither Nokia, or Microsoft, have pricing power at the moment does not bode well for the pricing power of suppliers," he said.