Sector Idea : Short Hong Kong Developers

The market has yet to recognise that Hong Kong developers are in the midst of a very painful and very lengthy transition. They are still seen purely as cyclical animals as opposed to beasts whose fundamental nature must change

Their business has to change from having high margins and low volumes in land-scarce Hong Kong to having lower margins and high volumes in land-plentiful China. This is at least a 5-10 year process during which overpriced landbanks in Hong Kong have to be run down before the benefits of expansion from China drive the full recovery.

This is a structural issue that the market has ignored and hence mispriced.’

‘The recent rise, bordering on euphoria, in Hong Kong developer stocks is setting up a very promising opportunity to take profits or to short.

The seductive twin arguments of falling US interest rates and more friendly government policies have seen developers like Sun Hung Kai Properties and Henderson Land approach their former price highs - long before we have had market clearing and let all the air out of the near 30 year-old asset bubble

20

30

40

50

60

70

80

90

100

Jun-00 Dec-00 Jun-01

Henderson Land

SHK Properties

-34.7%

-28.9%

8 March Hong Kong Developers

Sell

Market Idea : Thailand

‘About To Come Right’

• '7-Year Bear Market Ending'

• '5-Year Bull Market Ahead'

• 'Solid Positives Ignored'

• Misconceptions - Economy Stalling - Reform - Earnings - Market and Value - Politics

• Thailand's Strengths

60

80

100

120

140

Jan-01 Jul-01

Dollar Adjusted Indices

SET

STI

Hang Seng

Source: Reuters

September 2000

Big Idea : Overweight Southeast Asia

• Overweight Southeast Asia - we are not joking - for its relatively defensive qualities until the US recovery is in sight.

• Domestic resilience, supported by recovering natural resource-based incomes and by much higher local content in Southeast Asian exports, is likely to see the region in the second half again outperform Northeast Asia.

16 Aug 01

End 01 % ChgBelow High

End 02 % ChgBelow High

End 03 % ChgBelow High

Thailand 318 380 19.5 (59.0) 500 57.2 (46.0) 600 88.7 (35.2)Philippines 1,325 1,450 9.4 (57.9) 1,700 28.3 (50.7) 1,900 43.4 (44.9)Indonesia 436 480 10.1 (35.2) 550 26.1 (25.8) 600 37.6 (19.0)Malaysia 656 800 22.0 (37.1) 900 37.2 (29.2) 900 37.2 (29.2)

Source: Research-Works estimates

Index Targets: 2001-2003

2 Aug Overweight SE Asia

• Why Overweight Southeast Asia? : Defensive

• Political events are giving Southeast Asians a sense that after four very difficult years they have a second chance to recover from the Asian Crisis and its after effects.

Big Idea : Overweight Southeast Asia

- Seek relative safety of exporters with higher local content : natural resource-rich SE Asian economies

- SE Asia's commodities with +90% local content show signs of ending 10-15 year declines : palm oil up 50%, coconut oil up 30% : major income sources in Malaysia, Indonesia, Philippines.

- Tourism a consistent hard dollar earner, beneficiary of improving social stability

2 Aug Overweight SE Asia

Asia Stockmarket Relative Performance

70

90

110

130

Jan-01 Jul-01

Korea,TaiwanSafe HavensASEAN 4

3

2001’s Unexpected Outperformer

Source: CEIC

78.8

64.7

55.1

50.9

26.2

11.2

4.4

0 20 40 60 80 100

Indonesia

Thailand

Malaysia

Philippines

Korea

Taiwan

% of Exports Natural Resources *

Getting Exports In Perspective

% of Exports *

* Adjusted for local content and value-added in exports

Singapore

78.864.7

55.150.9

26.211.2

4.4

0 20 40 60 80 100

IndonesiaThailandMalaysia

PhilippinesSingapore

KoreaTaiwan

% of Exports Natural Resources *

* Adjusted for local content and value-added in exports

Big Idea : China

• ‘The most important long term decision that fund managers can make this year is to spend much more time getting to know China. Not only is it nearly 30% of regional market cap but 13 China Mega Trends will support some of Asia's best performance. Investors' perceptions lag reality or are fogged by out-dated experience. No longer can China be ignored.’

- Private Sector Dominance: overtakes state in 2002

- Private Property: critical to private sector-led economy

- Housing Reform: creates instant wealthMortgage Market Developing: 20% of urban new loans

- Consumerism Taking Off: $500 bn market larger than Korea, Taiwan, Hong Kong and Singapore combined

- New Mindsets: post Cultural Revolution generation

- End of Deflation: investment, consumption boosted

- More Taiwans: Taiwan companies pouring capital and people into Mainland at an accelerating rate

• Mega Trends will change China beyond recognition:

15 May China – The Most Important Decision

0

10

20

30

40

50

60

70

80

80 90 94 98 02E

Private Sector

State Enterprises

Historic Moment In 2002

TVE

% Share of Industrial Output

50

First Time Since 1949…

Research-Works ForecastSource: 2000 China Statistical

Yearbook

80

90

100

110

120

130

73 77 81 85 89 93 94 01

Macro Idea : Asian Currencies

• ‘The recent weakness of Asian currencies, with everything in thrall to the strong US dollar, strikes us as a misconception about what lies ahead over the rest of 2001’

• ‘Don't assume strong US dollar is permanent’

• ‘US imbalances unlikely to be ignored forever’

• ‘Only 20-30% US dollar fall can rebalance trade’

• ‘China could surprise: more flexibility, appreciation’

19 April Asian Currencies

Dollar Weakness Ahead

Broad Dollar Index