The euphoria created by the summer reunion of Hong Kong and China is over. Now if investors can only get rid of the hangover.
The Asian bubble has burst, and a lot of mutual fund dollars are dissolving with it. Currency speculation caused by overextended investments in Thailand, Malaysia and Indonesia led to devaluation of their currencies starting this summer and tumbled over into those local stock markets. Unresolved problems are still rumbling through the region, as seen by last week's sharp drop in the Hong Kong stock market.
One reason the Hong Kong market was hit is the fall in the value of so-called "red-chips" and H-shares -- stocks of companies spun off by, or affiliated with, various Chinese government entities, which have plummeted 42 percent since late August. TTC Which is why, in large part, the value of the 13 China-region mutual funds fell 15.8 percent during the past 13 weeks, according to Lipper Analytical Services Inc., a Summit, N.J., mutual fund rankings company.
But that is only part of the problem for those who invested in Pacific-region mutual funds. After the devalution of the Thai baht and the Malaysian ringgit currencies, funds in the Pacific-region funds category, minus funds that invest in Japan, fell 20.9 percent in the same period, with a carryover effect in the Hong Kong market.
"Fund managers have been selling shares in Hong Kong to meet redemptions because it is a much more liquid market than Malayasia or Indonesia or Thailand," said Bill Rocco, an analyst with Morningstar Inc., the Chicago-based mutual fund ratings company." There is general discouragement about the region as a whole" because of the currency problems and because "there are other exciting emerging markets like Russia, which is very risky, and Latin America."
Thomas Tuttle, co-manager of the Colonial Newport Tiger Funds, based in San Francisco, said the current Asian market reminds him of the worst days of the 1973-'74 bear market in the United States, "when every time you would walk in," everything would turn to garbage.
Tuttle puts part of the blame on spillover from the currency crisis and "a lot of young portfolio managers who don't want to get caught with anything in Asia and are trashing the area because all they care about is their quarterly numbers."
Those managers, he says, "are taking Hong Kong down with them because it has the best liquidity," meaning there is a market for the stocks they are selling.
The word used most by fund managers to describe the economic conditions that led to the currency crisis in Southeast Asia is "bubble," a term that should send investors running for cover because bubbles burst, and their money dissolves.
To oversimplify the currency crisis: Investors in Thailand, Malaysia, Indonesia and the Philippines borrowed money at lower rates outside their countries, then poured that cash into high-return, speculative development projects -- office towers, for instance. The rents and other returns dried up because of overbuilding, leaving investors with heavy debt and their countries with bloated foreign-currency deficits. That led speculators, reportedly including billionaire George Soros, to sell those currencies short, hoping to force their devaluation, then profit from it.
"Hong Kong managed to stay out of this for a while, but the problems of the neighboring countries couldn't be ignored," said Richard Farrell, a director of Guinness Flight in London, which has Asia and China-Hong Kong funds.
Hong Kong and China have had their own problems, too.
"In the beginning, the sales of the red-chip and H-shares were very strong because there was a lot of hype from the mainland, and the government saw this as a way to get as much as they could for their assets," said Barbara Trebbi, manager of the Ivy China Fund in Boca Raton, Fla.
"We have been pretty defensive about those [shares]," Trebbi said. "Both have been hit pretty hard and the Hang Seng -- the Hong Kong stock exchange -- is down about 21 percent since late August, partly because it is the most liquid market for Southeast Asia and people want to raise cash."
Tuttle said he had been cautious about the red chips because the Chinese "wanted you to pay 40 to 50 times [company] earnings [that] they hoped would come, and they hoped that raising the money would inject assets into the company.
"This is really a great lesson for investors," Tuttle said. "You have to understand what your time horizon is for these kinds of funds. For us, this is a short-term move that is an incredible buying opportunity, a once-in-a-decade opportunity to bottom-fish. When the overenthusiasms settle out of the system, there are some tremendous long-term quality stocks at reasonable prices."
But Guinness' Farrell is a little more cautious.
"It would be a good buying opportunity if it weren't for the fact they are still fiddling" with currency agreements with the World Bank and International Monetary Fund, he said. "The Thai finance minister resigned and the government refused to approve an increased tax on oil products that was necessary."
Even though Farrell said the red-chip stocks were nearly back to fair value, "which is a measure of how overheated they had become, I think we tend to be neutral about that market now."
Pub Date: 11/02/97