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1997-98: REVIEW AND OUTLOOK | STOCK SPOTLIGHT / WALTER
HAMILTON

Catching the Next Wave

Wall St. Pros, Girding for a Tougher Year, Think 'Solid' in Stock Picks

January 04, 1998|WALTER HAMILTON

Now that the presents have been opened (and returned) and the New Year's resolutions made (and broken), money managers will troop back to their offices tomorrow for the official start of the 1998 investment season with two big questions on their minds.

How will I make money this year? And how will I keep from losing it?

Sure, they're coming off three straight years of 20%-plus gains, but investment pros are girding for a less friendly 1998.

With profit growth in jeopardy as the Asian financial crisis does a slow boil, Wall Streeters want stocks that can churn out solid, if unspectacular, earnings. Most important, they want ones that won't disappoint.

"In general, most of us would be very happy with a modest up year," said Bob Smith, manager of the T. Rowe Price Growth Stock Fund.

Besides Asia and earnings worries, money managers expect several other major issues to hold center stage among investors this year: the continuing pace of mergers, the further restructuring of large companies and the march toward a single currency in Europe.

How these issues play out will go a long way toward determining the fate of the market this year. The Times spoke to several money managers last week to get a sense of how they plan to balance on each of these economic waves in the new year.

Asia

Most Wall Streeters remain extremely nervous about Asia. In the best-case scenario, they say, the region will stabilize this year and lay the groundwork for economic improvement in the future. That means individual investors trying to bottom-fish should be patient and careful.

For people who think the worst is over, closed-end country funds may be the way to go. Closed-ends are professionally managed mutual funds, most of them traded on the New York Stock Exchange. They eliminate the need to pick specific securities and give some measure of protection should things get worse.

About three dozen closed-end funds focus on Asian countries such as China, South Korea, Japan and Indonesia.

But be warned: For a brief time in early December, when it appeared that Asia had turned the corner and its battered stock markets would recover, several closed-ends notched strong gains. The three Korea funds, for example, surged between 16% and 23% over two days. But when new problems erupted, they quickly dove.

For investors who want to try individual stocks, keep in mind that many U.S. and foreign companies could choose to sacrifice profits at their Asian operations this year to gain market share, said Hugh Young, manager of the Phoenix-Aberdeen New Asia Fund.

"Provided it doesn't destroy the balance sheet next year, it's really not about earnings," he said. "It's getting your name well-known, taking over the opposition and building up your base."

Young likes the American Depositary receipts of Philippine Long Distance (ticker symbol: PHI) and PT Indosat (IIT), the Indonesian phone company.

"They're both very solid companies," he said. "They're market leaders that are well-managed and dominate their local markets."

He also suggests Pohang Iron & Steel (PKX) in South Korea. Steel is priced in U.S. dollars no matter where in the world it's sold, Young said. That's a crucial fact given the scramble many Korean companies have undergone lately to pay off dollar-denominated short-term debts.

Young and several other fund managers own HSBC Holdings (HSBA), the parent of Hong Kong & Shanghai Bank, the biggest bank in Hong Kong. Investors have fled Hong Kong lenders because of the region's huge debt problems and fears that the drop in Hong Kong real estate prices will mean problem loans for banks. But HSBC has interests throughout the world, not just Hong Kong, and also has cash to gobble up weaker institutions, fund managers say.

The region's financial problems mask the fact that "there are still a great many wealthy people in Asia" who continue to need banking services, Young said.

Rosemary Sagar, head of global equities at U.S. Trust Corp. in New York, believes the best way to play Asia is to stick with dominant global companies that can withstand the shock waves of the crisis.

She and others favor American International Group (AIG). The New York-based insurance giant underwrites policies in about 130 countries. The Asian woes shouldn't hurt AIG too much because its insurance policies double as savings vehicles in many Pacific Rim countries, Sagar said. With no Social Security, people will keep buying policies, she said.

Sagar also recommends Sony (SNE)American depositary receipts. Although Japan is troubled, Sony has big sales in Europe and the United States, with a lot of its production in Southeast Asia.

Also, many of its products have unique features. "Their technology is differentiated enough so that they're not going to be hurt by product deflation," Sagar said.

Sony is 12% off its Aug. 1 high of $103.25, but is up 18% in the last seven weeks.

"Considering what's been going on [in Asia], it's been holding its own," Sagar said.

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