View from City Road: Rewards and risks in the Far East

Hardly a day passes without east Asian stock markets posting new highs. Yesterday all except South Korea and Taiwan - which was on holiday - did so. But despite the present euphoria the risk- reward ratio in most of these markets is considerably less favourable now than it was at the beginning of last year.

With the exceptions of South Korea and Taiwan, the region's markets have risen rapidly during the past year as overseas investors, primarily from the US, have poured cash into them. Investors were motivated by low deposit rates at home and the relative cheapness of many Asian markets.

But things have changed. The Asian markets that received the bulk of overseas investors' cash last year are no longer cheap and US interest rates are shortly expected to edge up a little.

Baring Securities estimates that overseas investment into the stock markets of the Pacific Rim, excluding Japan, last year totalled USdollars 25.5bn ( pounds 17bn), up from dollars 10bn in 1992 and dollars 4.7bn in 1991. This year the firm expects about dollars 15bn.

Within this total, however, more money is likely to flow to South Korea and Taiwan than to their more expensive siblings.

These two have recently ended a three-year bear market and their economies are expected to pick up as demand for exports from the West increases with economic recovery.

Furthermore, the other markets are likely to suffer as the US dollar - to which most are pegged - strengthens, thereby reducing their competitiveness.

But while the focus may shift - and the best returns will come from South Korea and Taiwan - there is little risk of a serious setback in most of these markets, with the possible exception of Malaysia.

There, the prospective price- earnings multiple is in the high twenties by many brokers' estimates.