Y2K Issues Prove Nettlesome for Asia Stock Pickers

Portfolio managers are on alert as management competence and Y2K preparedness vary widely among countries in the region.
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So far, most scary Y2K scenarios have failed to materialize, even in Asia, where concerns have ranged from a rolling power grid failure to malfunctioning taxi meters. Last month, the Sept. 9 date, long touted as the so-called Y2K dress rehearsal, turned out to have been a piece of cake. All it caused was much gnashing of teeth.

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Y2K concerns, however, still persist. A worldwide survey of mutual fund managers by U.S. investment bank

Merrill Lynch

found that stock pickers in Japan and Asia were paying more attention to the potential impact of Y2K than managers in any other part of the world.

While Asia may seem like a unified region for the purposes of stock picking, portfolio managers realize there is a huge range of management competence and Y2K preparedness across the region. Hong Kong and Singapore are reckoned to be as ready for the impending calendar crisis as the U.S. and Canada. Indonesia and Thailand, on the other hand, could experience big power outages, according to Sean Debow, an analyst at

Warburg Dillon Read

.

The realization that Y2K could hobble some of the region's economies will become the driving element of last-minute asset allocation for Asia's fund managers, who have happily ridden the recovery of stock markets from Tokyo to Taipei, says Debow, who authored "The Millennium Bug in Asia."

Two results, both important for Asian stocks, could follow. Managers may just opt to ship their cash out of the region and sit on profits until things settle in January. Or they might reallocate money from Y2K-vulnerable countries to those that are better prepared.

"As year-end approaches, we expect portfolio liquidity to shift from 'perceived risky' countries/sectors to 'Y2K-ready havens,'" Merrill Lynch's report said. Merrill's report says Singapore and Hong Kong could benefit from this increase in liquidity, while China, India, Indonesia and Thailand are at risk.

Utilities, which are riddled with thousands of computer chips embedded in remote transformers located in the middle of jungles or on far-flung mountains, appear to be at greatest risk. Getting to all of them before the end of the year will be difficult in the region's less-prepared economies.

Merrill singles out Indonesian utility

Perusahaan Listrik Negara

, which it says is "weighted down by about $8 billion in debt," and "may not have devoted sufficient resources to fixing its Y2K problems." Similar concerns surround

National Power Corp.

in the Philippines, as well as electricity generators in India and Thailand.

The biggest question mark in Asian Y2K preparedness, however, lies in the region's biggest economy: Japan. There, Y2K fixes have been slow to get going, according to Merrill, and only about 40% of firms in the brokerage's survey group expect to be compliant this month. "September should be the month when the true scale of the problem becomes visible," it said.

As for Taiwan, it "may be somewhat at risk from a major disruption caused by Y2K," says WDR's Debow. "The government has set few guidelines and compliance checks for the major municipal and private providers of infrastructure." Debow says the government has no provisions for water or power shutdowns.

At greatest risk of breakdowns is Indonesia, where "the level of knowledge is just not there at all," Debow says. Many companies in Indonesia are so strapped for cash that even if they wanted to upgrade their systems for Y2K, they would not have the resources to do so.

Philip Segal is a freelance writer based in Hong Kong. At time of publication, Segal had no positions in any securities mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds.