CONFERENCE CALL: TIME TO SAY SAYONARA TO ASIAN EQUITIES

It may be time for investors to leave their overseas haunts and return to the home cooking of the U.S. small-capitalization market.

So says Frank Mastrapasqua, chairman and chief executive officer of Mastrapasqua & Associates, a money manager based in Nashville, Tenn. Mr. Mastrapasqua spoke at the Investment Management Consultants Association San Francisco conference earlier this month.

In the last four to five months investors have changed their asset allocation to reflect the instability of international – read: Asian – stocks. Since last summer, stock markets have plunged 81% in Indonesia, 65% in the Philippines and 67% in Thailand.

U.S. small-cap equities may be a good alternative, Mr. Mastrapasqua said, because they have shown extraordinary growth and don’t have the accounting and currency problems that plague foreign stocks. The liquidity of the U.S. over-the-counter stock market also is improving, he added, making it easier to buy and sell small-company stocks.

“U.S. small caps have been ignored while we chased foreign vehicles,” Mr. Mastrapasqua said.

Investors have grown more comfortable with international investing, but in the last few months they have learned the international markets might not be counter-synchronized with the U.S. markets.

it’s not like kansas

“They may be synchronized on the downside, but not on the upside,” Mr. Mastrapasqua said.

But investors are beginning to learn about the structure of Asian markets. “They’re not as free and open as we thought,” he said. “The markets have more in common with the Japanese than the U.S. markets.”

And the liquidity entering the Asian market didn’t help. In fact, it hurt the economy by spurring extravagant spending and rising interest rates, Mr. Mastrapasqua said.

But the U.S. multinationals have been winners: They’ve been capturing assets cheaply, especially in Korea, he said.

Global liquidity, the restructuring of corporate America and the recent “flight to quality” al
l favor large-capitalization stocks, according to Kent M. Baur, an analyst at San Francisco-based Montgomery Asset Management. Still, he told the conference audience, small caps are cheap given their price/earnings and price/cash flow ratios.

But small caps need a catalyst to jump-start a comeback. Blue-chip stocks, for instance, are most affected by an Asian slowdown because they have the highest exposure to foreign earnings. And once the Asian markets stabilize, the small caps will become more attractive as investors realize that larger companies won’t perform as they have in the past and look to small-cap firms to provide the growth. Besides, with the largest member of the Russell 2000 at $2.2 billion in capitalization, small cap isn’t that small anymore, Mr. Baur said.

through the fog, risk

For those still interested in the Asian markets, the economic climate is foggy at best, said another speaker, Edward D. Baker, senior vice president of Alliance Capital Management of New York.

Although it’s unlikely, one or more countries could default on their debt payments. A chance of more violent civil disruptions also exists, especially in Indonesia, he added. Widespread recession also is looming, particularly in Japan. And the banking systems may fail.

Still, stock valuations are attractive if investors can handle the risk, Mr. Baker said.

The currencies, economies and markets are still very unstable. And markets will move up sharply before their countries’ economies recover, Mr. Baker predicted.

“The problem,” he said, “is how to know when to get in.”