Fed's Move Did No Harm to Asian Stock Markets, for Now

Plus, updates on Malaysia, China and Indonesia.
Publish date:

Federal Reserve


Alan Greenspan

has carefully prepared world financial markets for what he has delivered, which is a positive. Equally positive for now is the oxymoron, "neutral bias."

Greed & Fear

agrees with

ABN Amro

Fed watcher Gerard Minack that the key US economic indicators to watch going forward, re the future course of US monetary policy, are US inflation and US hourly earnings data. The key financial market to monitor will, as always, be the US bond market. But it is wrong to think further interest-rate hikes are predetermined. That is not the present Fed's style. Policy will continue to be driven, on an incremental basis, by the numbers.

Greenspan's move will, for now, do no harm to Asian stock markets. The view that Asia can, with one obvious exception, decouple from rising US interest rates may be the consensus. But it is also true. Indeed, the new quarter is likely to herald further asset allocations into Asia, since in the world of investment management, money tends to be allocated after markets go up, not before.

This is not as crazy as it sounds, since bull markets do not usually end after three, or even six, months. The potential for future asset allocation flows into the region is one theme of the new

Asia Maxima

which will be out next week. Consider just one area of potential fund flows. That is the US mutual fund industry. The net inflow into Asia ex-Japan mutual funds was $375 million in the second quarter. This followed an outflow of $207 million in the first quarter. This is a clear sign that the tide has turned.

More significantly, the pace is hotting up. There was an inflow of $129 million in the last week of June alone. But there is plenty more, potentially, from where that came from. In the whole of 1996, net inflows into the same universe of funds totalled $1.55 billion. The next year there was a $2.04-billion stampede out as the Asian crisis caused American investors to run away.

Malaysia's Latest

The renewed bullish atmosphere in Asia is clear from the lack of moral outrage among foreign investors at the latest move in Malaysia this week in the long-simmering



United Engineers

, or UEM, and state-owned

Telekom Malaysia

have in a new twist to this sorry saga decided to bid this week for the entire 14 billion-ringgit portfolio at what amounts to an effective 42% discount via payment in Telekom and UEM B shares. This has been predictably rejected by the association representing Singapore's unfortunate investors who have had their Malaysian shares, held via CLOB, effectively kidnapped since last September.

There is a snag, however. Technically speaking, the vehicle which currently holds the shares of CLOB investors will remain an authorized nominee only until Dec. 31, after which time the shares become null and void. The

Kuala Lumpur Stock Exchange

can technically extend that deadline, but may choose not to given the political pressures that are clearly behind the UEM and Telekom proposal. Buying shares at a steep discount provides an obvious source of political funding in election season.

The Malaysian stock market will continue to rise in the run-up prior to the election, which is still expected to be held at the end of August. This is why foreign investors, encouraged by the bullish momentum, are beginning to return to the market. The index has now reached a level, around 850, where the share collateral in the banking system starts becoming good. This could quickly propel the

Kuala Lumpur Composite Index

, or KLCI, helped by rising projections of non-performing loans being written back, to the 1050 level. The bullish rationale will be made that if the Malaysian index had risen as much as Singapore's from last August's bottom, then the KLCI would now be at 1350.

The environment of easy liquidity in Malaysia is clear from the May 10.8% year-on-year surge in M2. This stems primarily from the rising trade surplus, though loan approvals are also now rising, up 85% year on year in May. But the more the Malaysian market runs now, the more likely any re-inclusion of Malaysia in the MSCI will become news to sell on, not buy, as locals and more trading-orientated foreigners will have by then bought heavily in anticipation of the event. It is worth noting that the stock market turnover in recent days, at over 2 billion ringgit, was as high as the heady days of 1993 in ringgit terms, the year when the market was at its most explosive. The moral of the story is that breaches of corporate governance only matter in bear markets. At other times they are only a concern of editorial writers and regulators. Such people tend not to own too much stock.

Meanwhile, Malaysian

Prime Minister Mahathir

is off to China at the end of this month prior to the anticipated election. This is one indication that he realizes that on this occasion UMNO will need the Chinese vote to secure a workable majority. The political atmosphere in Beijing would appear to have become more charged for his arrival. The past few days have seen renewed simmers over the strength of

Zhu Rongji's

political position.

Chinese Politics, Hong Kong Markets

Greed & Fear

finds it hard to believe that the Chinese leadership will be insane enough as to dispense publicly with Zhu. He performs too useful a role in keeping foreigners happy as well as making the hard decisions that no one else wants to make. But

Greed & Fear

finds it equally hard to believe that the reform process will be allowed to carry on unchecked.

The reality is that the sort of reform China badly needs -- most obviously state-owned enterprise restructuring and full-scale privatization of the banking system as well as the corporate sector -- would unleash a huge amount of social turmoil, since change, in the short term at least, is always disruptive. That is why full-scale reform is deeply threatening to the political status quo, however positive the ultimate economic consequences. The conservatives who therefore argue against reform are not being so illogical since they realize that unfettered reform threatens the position of the

Communist Party



President Jiang Zemin

, trimmer extraordinaire, can be relied upon to do his usual trick of leaning into whichever political wind is prevailing. Thus, the

People's Daily

quoted Jiang as warning that it was wrong for both foreigners and mainland officials to believe that China wants to engage in "privatization." Yet privatization was the major slogan coming out of the National People's Congress in March to much acclaim from China bulls abroad. It is also clearly the only way forward for China. In this respect it is worth remembering that there are less than five genuinely private-sector companies out of the more than 900 listed in China.

China will continue to pursue reform because ultimately it has no other choice. But it will always be a frustratingly stop-go process so long as the present 50-year-old political command structure remains intact. Meanwhile, the medium-term threat to Hong Kong is that the territory will become more than ever before a political football in future Sino-US disputes. This is because US congressmen who don't like China, of whom there are quite a few, will, encouraged by issues such as the right of abode, increasingly take the view that Hong Kong is part of China. That means, logically, subjecting Hong Kong to the same controls on technology transfer and the like.

None of this will affect stock markets in the short term. Indeed, Hong Kong is likely to continue to go up with the rest of the region on asset allocation flows because of where it sits on the map. Still, the nature of the place is changing, as clear from the legal principles breached in the right-of-abode controversy. This is troubling to anyone with an iota of capacity for mental reflection.

Meanwhile, the best thing the present Hong Kong government can do is press resolutely on with the privatization agenda. On that subject,

Greed & Fear

has happened upon an interesting speech given last month by Hong Kong's Director of Housing, Tony Miller, to the

Hong Kong Institute of Surveyors


A section is worth quoting to those who are skeptical that significant reform in the area of pubic-sector housing is on the way. "Experience has shown that the larger the public housing program has become, the less it has been able to focus on those most in need... As the market is restored, the accumulated distortions of 45 years of very direct government intervention will gradually disappear... In due course private-sector investors will be attracted back to the lower end of the market, a market segment from which they have been scared away by the sheer scale of government's intervention."

Renewed Political Questions in Indonesia

It has been called the "Anybody but


" movement. The Indonesian chattering classes, and their mouthpieces in the now-free press, are full of talk about possible coalition arrangements designed to prevent Megawati from becoming president. These are being pushed from a variety of disparate forces, from Golkar old guard to Muslim radicals to pro-reform intellectuals, all of whom are united only in their common will not to see the populist Megawati as president.

Is this a reason to go underweight in Indonesia on a relative basis? The answer is no, even though as in the rest of Asia, no absolute return investor will ever go bust taking profits lying on the table. Still, investors should be prepared for renewed noise on the political issue. Indeed the market has already begun to drift somewhat because of such fears. Conspiracy theories will abound about delays in the vote count. More troubling are growing stories that

President Habibie

is extremely reluctant to step down, especially if it means handing over power to Megawati.

As these stories mount, the silence from the Megawati/


camp has been deafening. The apparent reason is that the PDI has decided that the best tactic is to keep quiet until the voting is completed rather than to join everybody else in the speculation game. As a result, senior party officials are not briefing the press on record and Megawati remains supremely silent, waiting in supposedly dignified silence to take her appointed position like an old Javanese monarch. This is probably the right strategy, though it is a risky one. The first point to remember in Indonesia is that if Megawati looks like being thwarted by game playing, the PDI has the clear power to put two million people on the streets of Jakarta at 12-hours notice.

People's power has arrived in Indonesia and it is unlikely to be thwarted. Based on the latest tally after some 60% of the votes have been counted, PDI has 36% of the vote against Golkar's 19%. These are numbers everybody can understand, though in terms of seats, PDI will not be represented fairly in proportion with the popular vote.

The second key point is the attitude of the military. ABRI under its commander, General Wiranto, is remaining steadfastly neutral for now, which is the sensible strategy. The military wants to retain its status as the institutional anchor of modern Indonesian society.

Greed & Fear

cannot contemplate a more self-destructive tactic on ABRI's part than openly to flout the will of the people, so long as it does not involve endorsing a radical Islamic government, which is not the case. The military will, therefore, end up doing the obvious thing. That is supporting the winner.

Christopher Wood is the global emerging market strategist for ABN Amro and the author of The End of Japan Inc. (Simon & Schuster, 1994). Under no circumstances is this to be used or considered as an offer to sell, or a solicitation or recommendation of any offer to buy. While Wood cannot provide investment advice or recommendations, he welcomes your feedback at