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SCMP Reporter

The people power-inspired surge in Philippine stocks underlined the stunning gains which can be made in Asia's neglected minor markets when months of political tensions are eventually unwound.

The Philippine Composite Index finished yesterday up 17.56 per cent after being an incredible 34.5 per cent higher earlier.

Investors swiftly dismantled the risk premium factored in during the tumultuous final weeks of Joseph Estrada's discredited presidency.

Thailand has also been enjoying some politically inspired gains with the provisional landslide victory of tycoon Thaksin Shinawatra's Thai Rak Thai party, removing much of the political uncertainty which dogged the market for most of last year.

Thailand's benchmark SET Index has gained 17.7 per cent this month.

But Thailand, Indonesia and the Philippines, deridingly dubbed the 'tips' - as in rubbish - remain little more than punting markets, ING Barings country specialists contend - even with some of the political kinks ironed out.

The investment bank has now added Malaysia to that trio of perceived basket cases.

All four countries rate zero in ING Barings' regional model portfolio weightings .

'As you can see from Thailand when something goes . . . as the market would want to see, there is significant upside,' said Kenneth Ng, ING Barings head of research in Bangkok.

'There are opportunities to make a lot of gains in a very short period of time.

'But not more than that.

'That is the way people will treat these markets until there

is a lot more . . . longer-term investment.'

With what happens in the corridors of power becoming so important for tips markets, analysts are going into as much depth modelling political scenarios as they do corporate earnings.

ING Barings head of Philippine research, Joey Cuyekeng, produced a complicated flow chart for how events might unfold in Manila to take with him on a two-week marketing trip with his colleagues from Malaysia, Thailand and Indonesia.

One possible outcome he outlined was a cabinet revamp with no more midnight deals by Mr Estrada and his cronies and reform moves being handed over to economic technocrats.

Mr Cuyekeng even divided Manila's 22 senators into pro-impeachment, pro-acquittal and the swing-vote camps.

But half way through the

marketing trip he had to toss all this hard work and analysis out of the window when an outcome happened he had not anticipated - that the senators would vote to suppress evidence and the impeachment trial would be suspended.

As late as Friday lunchtime, Mr Cuyekeng was recommending investors build a defensive portfolio if they dared buy Philippine stocks at all. 'In this kind of an environment basically we think there is further downside in the market,' he said.

'It is so difficult to invest on a key event happening. If you are wrong you are dead. You will not lose just a foot - but an arm and

a leg.'

But events on Friday and Saturday conspired against him once again as Vice-President Gloria Macapagal Arroyo grabbed the reins of power from Mr Estrada with some help from the military, the supreme court and hundreds of thousands of demonstrators.

Mr Cuyekeng's travails illustrated how tough it can be for analysts to make good political calls which can make investors a lot of money - or save them from losing it.

But the question is: Do Asia's smaller markets deserve to live and die by their politics? In the past, coup attempts and changes of governments might have had a short-term impact, but not the drastic overhangs which have lasted months and in Indonesia's case are still unresolved.

To some extent, Mr Ng said, there is a rule for the North Asian markets and another for the tips and Malaysia. 'I think for the smaller markets to succeed you need to be doing much more than some of the larger markets.'

'You need to see improved corporate governance, more transparency, maybe less protectionist measures to encourage foreign investments,' Mr Ng said.

In terms of economic size the tips and Malaysia are not so far behind their rivals in the North Asian region.

Thailand had a gross domestic product of US$124 billion in 1999, not far behind Hong Kong's US$159 billion. Indonesia, meanwhile, had a gross domestic product of US$141 billion, nearly half Taiwan's US$288 billion.

But the weighting in Morgan Stanley Capital International's Far East Free ex-Japan, widely followed by regional fund managers, tell a different story. Before the Asian financial crisis struck, the tips and Malaysia were important parts of the MSCI Index, insulating them against their political indiscretions because fund managers had to be there or take 'benchmark risk'.

Malaysia made up 22.77 per cent of the benchmark, Thailand 13.45 per cent, Indonesia 7.36 per cent and the Philippines 4.1 per cent - a combined 47.68 per cent.

But the ravages of the crisis and the introduction of China and Taiwan to the index have changed all that.

Malaysia now has 9.12 per cent, Thailand 2.53 per cent, Indonesia 1.19 per cent and Philippines 1.2 per cent, giving an aggregate of only 14.04 per cent.

Taiwan has its own tangled politics, a potential banking crisis which is still unfolding and, perhaps most worryingly, stands permanently on the threshold of war.

But its 20.41 per cent weighting in the benchmark means these problems will be taken less seriously than those in the tips and Malaysia, which the investment community finds easy to dump on as MSCI plays shepherd to the herd mentality .

Graphic: grap23gbz



Ranks failing to reflect realities