PRESENTATION BY MR NG KOK SONG MANAGING DIRECTOR (PUBLIC MARKETS), GIC AT THE AIMR GLOBAL INVESTORS WORKSHOP-ASIA

17 FEBRUARY 2003, MONDAY

CHALLENGES FACING THE FUND MANAGEMENT INDUSTRY IN ASIA

Our first challenge is to navigate our way through the current treacherous financial market environment.

• Since its peak of 1527 in late March 2000, the S&P 500 stock index has fallen 45 % to 835 last Friday. Since its peak of 1449 in March 2000, the MSCI World index has declined 48 % in US dollar terms. In Japan, the stock market has declined 77 % from its peak at the end of 1989.
  
• In Singapore, equity investors have not been spared the trauma of losses. 80% of CPF-approved unit trusts and investment linked insurance plans showed negative returns for the three years to December 2002. The average equity unit trust fell 40%.
  
• It is hazardous to forecast whether this bear market will soon come to an end. The imbalances built up in the bubble years, of over-leveraged corporate balance sheets and of excess production capacity, probably need more time to be worked through. The continuing threat of terrorism and the impending Middle East conflict pose considerable event risks to equity investors. We cannot confidently count on the US economy to generate sufficient demand to keep the world economy growing at a satisfactory rate. The risk of deflation is non-trivial. The US stock market remains vulnerable to negative developments because there is a lack of valuation conviction among most investors that stocks are cheap relative to bonds.
  
• One way for investors to respond to this highly uncertain and risky environment is to seek diversification of asset classes.

• Asia is growing faster than the rest of the world. In 2003, Asia GDP growth is estimated at 5.2% led by China at 7.8%. This growth rate is much higher than the world average of 2% to 2.5%. The superior growth potential is due to continuing strength in domestic demand and the bandwagon effect of China's growth. Private consumption is expected to be strong in India, China and Thailand, driven by low interest rates, expanding bank credit, tax incentives and income growth. China will continue to have abundant FDI inflows.
  
• Asian corporate profitability in terms of Return on Equity (ROE) is on par with global levels. Since the Asian crisis, balance sheet repair has been extensive and leverage has fallen sharply.
  
• Versus global stocks, Asian stocks trade at a 30% discount in terms of Price to Book Value.

• There may be a parallel between the emergence of Japan and China as economic powers. From 1946 to 1973, as Japan reconstructed its economy after the War, its average annual growth rate was 10%. This period has sometimes been referred to as the second Meiji Restoration. In the early 1980s, China emerged from the Cultural Revolution with its economy virtually in ruins. In the last 20 years, China has achieved an average annual growth rate of 10%. In 1971, the Japanese yen was pegged at 360 yen to US$1. The Smithsonian currency realignment that year revalued the yen to 308. Today the yen trades at 120 to the US dollar. We have recently heard calls (from Japanese Finance Minister Shiokawa, and former White House economic adviser Larry Lindsey) for the renminbi to be unpegged from the dollar so that it can be allowed to appreciate.
  
• We should be mindful, however, that high economic growth does not necessarily translate into profitable equity portfolio investments. In the 1950s, the Japanese Nikkei 225 appreciated about 8-fold. For China stocks, in the last 10 years 1993-2002, the Shanghai "A" share index has had a cumulative return of only 74%. It has been said that out of over 1000 domestic A-share companies listed, only 50 are investable. The MSCI China index of Chinese companies listed in Hong Kong fell 86% in the last 10 years. The divergent performance between the Japanese and China markets was primarily due to the quality of the investable universe. Most China stocks were of companies saddled with the legacy of poor profitability from a centrally planned economy. It is important to recognise that the China investable universe may steadily improve in quality. Better Chinese companies in growth industries such as IT manufacturing and consumer products will be listed.
  
• At GIC, we think that investors hunting for China profits would be better served by thinking "outside the box". China's economic importance is being felt globally. Global equity investors should be asking which companies in America, Europe, Japan and Asia would benefit, suffer or be relatively unaffected by the burgeoning growth in China. Let me cite some examples to illustrate my point.
  
• Global commodities is one sector which increasingly feels the pervasive effect of China's growth. China accounts for a large and growing portion of global demand and supply in commodities such as iron ore, steel, pulp, copper, nickel and aluminium. As China is a resource poor country, rapid industrialisation is fast exhausting its natural resource base, and imports are increasing. This has positive implications for global companies such as BHPBilliton, Rio Tinto, Inco, Western Mining, Carter Holt, Sumitomo Chemical, Formosa Plastic. Conversely, we have seen that Alcoa's business has suffered because of the rapid growth of aluminium capacity in China.
  
• Another group of winners comprises companies which have exploited China's low-cost production base to improve their profitability and market share. Funai (Japan), Texwinca (Hong Kong) and Hon Hai (Taiwan) are 3 Asian examples.
  
  
• A third investment theme has to do with the increasing purchasing power of Chinese consumers. China is now the largest market in the world for mobile handsets. The next big battle for global dominance in mobile handsets looks set to be fought in China. The CEO of Nokia is giving China a lot of attention. Similarly, in the automobile sector, China is already the 4th largest car market in the world with an estimated 3 million units sold in 2002. Companies such as Honda and Volkswagen are focussing on the consumer opportunities in China.