JAKARTA -- The second quarter has opened with more evidence of fund flows back into Asia.

Of the biggest liquid markets in Asia, Greed & Fear continues to favor Korea, where there seems little to stop corporate bond yields declining to the 5% level. Such a move will trigger further flows into the stock market from retail investors. There is money to spend, and margin loans in the stock market also remain low by historic standards.

The more foreign investor sentiment improves on Japan, the more Korea will benefit. Both Northeast Asian stock markets are, in Greed & Fear's view, perhaps the least correlated in Asia with the aging bull on Wall Street. This is different from Hong Kong and Taiwan. Hong Kong suffers from the interest-rate linkage. It is not inconceivable that, despite the deflationary backdrop, Wall Street could be brought down by a continuing increase in Treasury bond yields, just as it was in October 1987.

If so, near-term fears of inflationary overheating in the U.S., reflected in a rising current account deficit, a plunging savings rate and strong credit growth, would soon be replaced by concern about a deflationary aftermath stemming from wealth destruction in the equity market. A new all-time high on the

Dow

occurred April 7 at the same time as 71 new highs on the

New York Stock Exchange

and 121 new lows. This is most unusual.

DRAM Jam

If Hong Kong's vulnerability to Wall Street is via interest rates, Taiwan's is through the highly rated technology sector. Both the Taiwan and Korean markets are for now shrugging off the weakness in 64Mb DRAM prices, which seems to have been driven by the Taiwanese producers ramping up production to exploit their lower production costs.

We expect that, by the end of the year, some 40 million chips a month could be coming onto the market from Taiwan makers. Still, the biggest sufferers from this development will not be the Taiwanese or Koreans but the Japanese DRAM makers, who find themselves decreasingly competitive. That is likely to accelerate an already clear trend whereby the Japanese are farming out production to Taiwan.

Optimistic About India

The past few days have seen some nervousness in the Indian stock market out of fears that the coalition government will fall. This has been caused by the

BJP

-led government refusing to accede to the demands of a coalition partner, the regional

AIADMK

. Greed and Fear believes that the BJP is likely to prevail, which will be positive for the stock market.

The BJP has begun, after an initial rocky start in government, to generate in recent months some genuine reform momentum in terms of policymaking. The most significant reform to date has been the repeal of the obnoxious

Urban Land Ceiling Act

. This has been approved by the

Upper House of Parliament

, where the ruling party is in a minority. Repeal in the

Lower House

should be a formality. This will free up a lot of land for construction activity, making the property sector a significant catalyst for growth as property prices fall and demand goes up.

India has been the one country in the Asian universe not to benefit from the catalytic property effect in its recent economic history as a result of its adoption of British socialist legislation postindependence in such areas as urban planning and rent control. Hopefully, that is now about to change. The cement sector is one obvious beneficiary, and statistics are already beginning to show this in terms of an increase in demand. Cement consumption grew by 10.9% year on year in the first two months of 1999. Meanwhile, property prices have already begun falling in both Bombay and Delhi, partly in anticipation of this legislative change.

Another reform initiative is tariff rebalancing in telecoms, which is due to be implemented from May 1. In the long-neglected utilities sector, the government has indicated that 14 power projects of 250 MW or higher will be approved in the near future. This is encouraging, since almost nothing has happened in the power sector for the past four years.

Also positive is the considerable improvement in the stock-market infrastructure with the growing prevalence of paperless trading. As a result, the trading system is no longer a reason for foreigners not to be involved in this market. Foreign investors turned net buyers again in the first quarter, purchasing $214 million worth of shares.

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

commentarymail@thestreet.com.