Indonesia, S. Korea tipped as born-again Asian tigers

Indonesia, S. Korea tipped as born-again Asian tigers

LONDON (Reuters): Ask emerging markets experts to tip some born-again Asian tigers and one frontrunner is predictable -- South Korea. Another is not for the faint-hearted investor, it is Indonesia.

Two years after the Asian crisis began, Reuters asked 25 economists and fund-managers in Asia, Europe and the United States to forecast which emerging economies would produce the best investment returns in the coming 12 months.

Asia, all but written off until a rebound began late last year, emerged as the region mostly likely to perform. Within Asia, South Korea and Indonesia were the most popular bets along with Thailand, the first country to succumb to Asian contagion.

The reasons were very different. South Korea, which was on the brink 18 months ago, is recovering strongly. The main worry there is that lower risk may mean lower returns.

Indonesia is the opposite. It has scarcely passed the low point of its crisis and offers spectacular profits if all goes well -- and spectacular losses if things go wrong.

Investors are ready to dip into countries they would scarcely have touched very recently. "Our appetite for risk is a lot greater than it was six months ago," said Alistair Thompson of Edinburgh Fund Managers.

The economists were canvassed before the U.S. Federal Reserve raised its main short-term interest rate by a quarter percentage point on Thursday to 5.0 percent. The rise had been expected and the Fed reassured many in the emerging markets by hinting that rates were unlikely to rise again for a while.

"We see the best returns in the crisis economies," said Thompson. "In Korea we may have seen interest rates close to the bottom. Thailand has a bit further to go and Indonesia much further to go."

Indonesia could offer 50 percent returns in the next year but he added: "Indonesia is very, very high risk."

Not everyone is bullish on Indonesia, which is struggling to establish a stable democracy following elections last month.

"I'm still cautious about Indonesia. I'll believe it when I see it," said Charles Blitzer at Donaldson, Lufkin and Jenrette. Would-be Indonesian investors also need to know where to put their money.

"Potentially it's a winner across the region but that's if you invest in the right companies in the right sectors," said Bhanu Baweja at IDEAglobal.com in Singapore.

South Korea led the Asian recovery but the problem is it is no longer a bargain like Indonesia. On equities, the KOSPI Index has jumped from under 300 points last September to over 900. In dollar terms it is close to where it was before the crash.

Some felt there was still money to be made there.

"I think Korea is on the firmest footing because the recovery is locked in, and also we're seeing domestic demand recover," said Helen Camp, head of market economics at Westpac Banking Corp in Sydney. "There will be structural reform, but I don't think it's going to be pursued so aggressively that it substantially weakens the economy."

Leading countries in the rebound have undoubtedly overcome the immediate crisis of collapsing currencies and stock markets. But have they have tackled the problems which started the crisis such as poor company management, cronyism and bad bank loans?

"The Asia-Pacific recovery has further room to run," said Mina Toksoz at ABN Amro in London. "However, restructuring is something that is very much trailing behind the stabilization of the economies," she said, citing serious problems with the banking sector and huge industrial overcapacity.

Singapore scores highly on restructuring and its recession was short and shallow. Again it doesn't come cheap. The Straits Times stock index closed on Monday at a record high.

Two tigers of the boom years have yet to be born again -- China and Hong Kong. These two helped to stop the Asian rot by resisting the wave of regional currency devaluations.

Hong Kong is paying the price for keeping its dollar pegged to the U.S. dollar. It has missed out on the competitive boost from devaluation that its rival Singapore enjoyed.

Any decision to scrap the peg could undermine the Chinese yuan. "The flipside is that (the peg) is a pillar of stability although in an economic sense it is holding up reform," said Thompson at Edinburgh Fund Management.

Any yuan devaluation could set off another cycle of devaluation and crisis around the region. "China is the biggest risk to recovery in Asia," said Toksoz.