15:50 31May2002 RTRS-INTERVIEW

By Nick Edwards

Investors underestimate scale of central bank risk

HONG KONG, May 31 (Reuters) - Guardians of global financial market stability, the world's central banks are also the biggest risk to investment returns, a senior fund manager said on Friday.

"We need to admit that there is something called central bank risk and that every single portfolio suffers from it," Richard Werner, chief investment advisor at Tokyo-based hedge fund, ProfitFundCom, told Reuters. "Central bank risk is totally underestimated," he said. The lenders of last resort tend to focus investor attention on the interest and exchange rates they manage. Instead they should be more forthcoming about their activities in credit creation and money supply, said Werner, who manages and advises funds worth around US$3 billion, including NTT Corp's <9432.T> TelWel pension fund.

"Interest rates neither accelerate an economy, nor do they slow an economy. Look at America in the 1990s. Alan Greenspan raised rates many times, but did that slow the economy? No. Why? Because he also raised credit creation," Werner said. "If interest rates are really as useful (to economic growth) as people claim, how come the Bank of Japan can reduce rates to zero and the economy not respond? Clearly interest rates cannot explain what has happened," he added.

Japan's interest rates have hovered near zero since 1995 and for most of that time the economy has struggled to grow. Fresh indications that it was beginning to recover were attributable to a massive credit and monetary expansion by the Bank of Japan (BOJ), said Werner, a one-time BOJ staffer and former chief economist at Jardine Fleming Securities (Asia).

He said it takes about a year for a credit expansion to lift an economy and that the stock market begins to anticipate it one to two quarters ahead. The BOJ revealed earlier this month that Japan's monetary base rose by a giant 36.3 percent in April from a year earlier to US$715.8 billion, the biggest increase since August 1974 and the eighth consecutive month of double-digit growth.


Japanese stocks have had a dramatic bounce since the blue chip Nikkei 225 <.N225> hit its year low on February 6. The Nikkei has risen 25.1 percent since then to become the best performing benchmark index in Asia over that period, with the broader Topix Index <.TOPX> just behind, up 21.4 percent. Werner's global-macro hedge fund has ridden that wave up, along with a 56 percent jump in the value of Taiwan's key TAIEX index <.TWII> which he bought into last September when he noticed credit growth taking off there.

Analysing 30 central banks around the world to spot credit growth trends, Werner said those in Taiwan, Malaysia and Singapore were the best in Asia at managing policy, while those in Indonesia, South Korea, Thailand and Japan were the worst. His fund, which buys equity index futures, local currency bonds and takes foreign exchange positions, is long the euro <EUR=>, trading at around 15 month highs, and Belgian and Austrian equities.

In Asia, it has equity exposure to Japan, Taiwan and South Korea, where the Bank of Korea is still expanding credit despite raising interest rates 0.25 percent earlier this month. It does not have any exposure to equities in Singapore, which Werner said was showing signs of curtailing credit growth, and he was not yet negative enough to buy the city state's bonds. Bank credit growth in Singapore was flat in April after slowing to 1.6 percent year on year in March 2002, down from 2.4 percent in February and far tighter than December's 5.8 percent and November's seven percent growth year on year.

"In many Asian economies we are too positive to buy the bonds, but not positive enough to buy the stocks," Werner said.

Nick Edwards
Chief Investment Correspondent, Asia
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