Crisis dominates markets

01 June 1998 00:00  [Source: ACN]

Indonesia's political and economic chaos dominates regional market sentiments

The Indonesian political crisis dominated market news for most of May, although print deadlines meant that the full implications of Suharto's resignation could not be reflected in this month's Sharewatch. Elsewhere, nuclear tests drew renewed attention to India.

Market summaries:

Even up until the end of April, the Indonesian equity market had remained one of the best performers of those in our coverage. Attention was focused on financial issues, specifically on discussions between the government and the International Monetary Fund, which appeared to be reaching a conclusion. But, in early May, the focus shifted to social unrest triggered by opposition to President Suharto which led to his resignation.

As a result, the Jakarta index gave up most of the gains made since January, against a background of thin trading volumes.

Petrochemical producers and processors were confronted by hurdles, such as roads being closed due to social unrest and product stranded in ports, in addition to their existing problems of precarious domestic demand and an inability to raise letters of credit.

The stocks in the sharewatch table have all come under pressure since early May, and all except Polysindo underperformed the index. Sentiment towards individual shares was not helped by severe 1997 losses reported by TriPolyta and Trias Sentosa; TriPolyta's poor results have continued into Q1 of the current year.

The ramifications of change in Indonesia will be felt for some time to come, both in equity markets and in the chemical industry. Indeed, all the markets in our coverage lost ground over May as an air of renewed uncertainty pervaded the region.

Elsewhere in Asean, the Thai market fell heavily, dragged down by concerns over Indonesia which were initially reflected in a weaker baht. The equity market was also unsettled by continuing concern over the domestic banking sector. The ratings of a number of banks have been further reduced by rating agencies and lack of liquidity remains a problem.

Ironically, the market fell at a time when the government is seen as having followed a credible path to eventual economic recovery.

Chemical-sector interest continued to focus on Thai Petrochemical Industry (TPI), the share price of which has retreated to January levels in the wake of its massive 1997 loss.

Although Q1 1998 results showed the benefit of the recovery in the baht, the company's underlying finances remain fragile. Market attention is now beginning to look forward to the long-awaited restructuring of the TPI group, details of which are expected in June.

Vinythai remains the strongest performer over the year to date of those in our coverage, although that company too gave up some ground over the last month.

In contrast to concerns over events in Southeast Asia, international attention towards India was centred on the recent series of nuclear tests. Prior to the tests in mid-May, domestic market interest was focused on the forthcoming budget, due on 1 June, which is expected to provide further indications of the new government's intentions.

The possibility of the imposition of US sanctions took the rupee sharply lower in mid-month, down to record lows against the US dollar. The equity market was also dragged down.

However, when it became apparent that sanctions would be at government levels rather than aimed at the private sector, the equity market recovered. This recovery was helped by government approval of some 50 major foreign investment projects in several key sectors.

Chemical-sector interest at the beginning of the month centred on full-year 1997 results from Reliance Industries. The results showed the benefits of the major's substantially increased and integrated production capacity, which helped offset pricing pressures and higher interest and depreciation charges resulting from completion of the new capacity.

As a market leader, Reliance was not immune from the mid-month index fall, but the shares continue to outperform.

Turning to Northeast Asia, markets were affected by both the Indonesian crisis and by local factors.

The Chinese H-share market was persistently weak during May, partially as investors absorbed the generally poor round of 1997 results and partially on the back of continuing concerns for the economy.

Statements of intent to reduce labour forces, at Shanghai Petrochemical Co for example, although potentially a positive at the corporate level, serve to reinforce the message that China is likely to see widespread unemployment in the next few years. With domestic demand already subdued, the country's new leadership faces the challenge of maintaining sufficient levels of economic growth.

The rump of the chemical H-share results brought confirmation of a difficult 1997, and most companies reinforced the impression that 1998 will also be challenging.

Although the Taiwanese market eased back over the month, the stocks in our coverage came in for tough treatment and generally fared much worse than the index. The market itself was affected in the middle of the month by concerns over the size of cash calls from the major banks. The index was also affected by the Indonesian crisis.

Chemical-sector stocks continued to be adversely affected by the implications of poor Q1 results, notably those in the Formosa Group. Confirmation that the group was planning to raise some NT$30bn (US$898m) by way of a rights issue actually proved a positive for share prices, as did news that Formosa Plastics Corp would sell land to help fund its sixth cracker project. Formosa Plastics also retrospectively increased its 1997 dividend as did two of the other Formosa Group companies, moves which were designed to ease the forthcoming rights issues.

The Korean market continued to lose ground over May, although the bulk of the stocks in our coverage remain well ahead of the index.

Against a background of continued concern for corporate stability - insolvency speculation surrounded Kohap in mid-month for example - attention was focused on the potential for restructuring. Both the LG Group and SK Corp announced plans to dispose of non-core assets, with foreign investment being targeted following an easing of the rules covering such acquisitions.

In Japan, the Nikkei index gave up further ground in May, with background concerns over the economy offsetting the government's stimulus package. Indications that permanent income-tax cuts were unlikely in the near term also undermined sentiment. As the month progressed, concern over the exposure of the banking sector to Indonesian debt rose as tension mounted in Southeast Asia.

At the same time, the yen came under increasing downward pressure and yields on the key 10-year government bond reached record lows, in response to economic worries.

The stocks in our coverage, however, held onto earlier gains.

Mitsubishi Chemical moved ahead over the month. It continued to restructure its business and announced in late April that it was partially hiving off its PE and PP operations and was merging its PS operations.

Showa Denko decided not to pursue with silicon wafer production and abandoned plans to move to full-scale output. However, the company raised its holding in an agrochemical business, SFS Biotech, from 34% to 98%, giving it a broader exposure to the sector.

Asian sharewatch*

	Value	Value	% change	Value	% change
	23 May 1998	2 Jan 1998	year to date	23 May 1997	12 months
China (HK$)
Shanghai Petrochemical Co	1.060	1.190	(10.9)	1.900	(44.2)
Yizheng Chemical Fibre	1.070	1.380	(22.5)	1.570	(31.8)
Jilin Chemical	l0.840	0.890	(5.6)	1.280	(34.4)
Zhenhai Refining	1.880	3.125	(39.8)	3.100	(39.4)
HS China Index	595	720	(17.4)	1049	(43.3)
Taiwan (NT$)
Far East Textile	29.10	35.40	(17.8)	38.39	(24.2)
Formosa Chemicals and Fibre	33.40	38.60	(13.5)	36.04	(7.3)
Formosa Plastics Corp	57.00	64.00	(10.9)	59.64	(4.4)
Nan Ya Plastics	52.50	56.50	(7.1)	61.71	(14.9)
Taiwan Polypropylene	27.40	36.80	(25.5)	45.19	(39.4)
Taiwan Styrene Monomer	26.80	32.90	(18.5)	31.60	(15.2)
Taiwan Index	8267	8159	1.3	7997	3.4
South Korea (Won)
Hanwha Chemical	2400	1810	32.6	7806	(69.3)
Honam Petrochemical	9800	6680	46.7	13 800	(29.0)
LG Chemical	9800	7630	28.4	11 600	(15.5)
SK Corp	9700	13 000	(25.4)	18 200	(46.7)
KOSP Index	369	385	(4.2)	735	(49.8)
Thailand (Baht)
National Petrochemical Co	26.25	25.50	2.9	23.75	10.5
Thai Petrochemical Industry	4.30	4.70	(8.5)	20.25	(78.8)
Thai Plastics and Chemical	91.50	85.00	7.6	86.00	6.4
Vinythai	5.00	2.40	108.3	4.30	16.3
Bangkok SET Index	346	366	(5.5)	577	(40.0)
Indonesia (Rp)
Indo-Rama	1425	2375	(40.0)	1975	(27.8)
Trias Sentosa	175	250	(30.0)	1100	(84.1)
Polysindo	925	975	(5.1)	952	(2.8)
TriPolyta ADRs (US$)	1.94	1.13	71.7	5.13	(62.2)
Jakarta Index	414	410	1.0	653	(36.6)
India (Rs)
Gujarat Alkalies and Chemical	55.00	68.75	(20.0)	67.00	(17.9)
Indian Petrochemical Corp	73.00	74.25	(1.7)	136.00	(46.3)
Reliance Industries	181.00	169.75	6.6	148.00	22.3
Bombay 30 Index	3924	3720	5.5	3768	4.1
Japan (Yen)
Mitsubishi Chemical	250	169	47.9	399	(37.3)
Nippon Shokubai	689	529	30.2	825	(16.5)
Showa Denko	142	114	24.6	308	(53.9)
Nikkei 225 Index	15 653	14 957	4.7	20 333	(23.0)
Source: Datastream		* January-May 1998

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