Investors Got Asia Right in 2004. And 2005?
by William Pesek Jr.
Dec. 17 (Bloomberg) -- Anyone looking for a reality check on Asia could do worse than come to the scene of the crime, so to speak. That would be here in Bangkok, where this region's worst financial crisis in decades was set in motion.
Thailand didn't cause the meltdown, though its currency devaluation in July 1997 marked the beginning of the end of the double-digit growth rates investors came to expect from Asia. In the seven-plus years since, Thailand's economy and markets have often been the vanguard of investors' sentiment toward Asia.
Scenes in this spirited city of 8 million do indeed say much about Asia's strong post-crisis revival. So strong is Asia's ninth- biggest economy these days that Thailand's central bank just unexpectedly raised its key interest rate to 2 percent from 1.75 percent for the third time in four months to curb inflation.
Wandering Bangkok's streets, it's not hard to see why. While there is still considerable poverty, increasing numbers of twenty- somethings linger in trendy downtown cafes, nursing cappuccinos or French wine. Fashionably dressed Thais saunter from boutique to boutique shopping for the latest styles from Louis Vuitton and Gucci. And hotel lounges are again abuzz with foreign investors on the lookout for opportunities.
It's a striking contrast from just a few years ago, when Thailand, like much of Southeast Asia, lay coughing and wheezing amid Asia's financial crisis.
``Asia is certainly white hot at the moment,'' says Callum Henderson, head of currency strategy at Standard Chartered Plc. ``It reminds me of 1996.''
There's a key difference, though: Investors' exuberance toward Asia is far less irrational than it was back then.
2004 has been a year when many investors got Asia right. Stock markets in Australia, Hong Kong, India, Indonesia, Malaysia, New Zealand, Pakistan, the Philippines, South Korea and Sri Lanka are recording double-digit gains this year.
Japanese stocks are up 8 percent, while Taiwanese shares are up more than 7 percent. Thailand, even with 6 percent growth and its role as a barometer for Asia, is one of the few laggards; its SET Index is down 13 this year. Yet much of the loss can be explained by the fact Thai shares jumped 117 percent in 2003. Investors are waiting see if 2003's rally was justified.
Will investors' bets on Asia also pay off in 2005? It's quite possible.
Risks and Wild Card
Asia, after all, has what the West doesn't: rapid gross domestic product growth, swelling populations, emerging middle- class consumer sectors, growing cities and evolving markets. Many investors believe Asia's equity markets are trading at much lower price-to-earnings ratios than larger ones.
Furthermore, many investors are underweight Asian equities because of their small role in indexes like the MSCI World Free Index. Foreign investors fed up with paltry returns on bond yields in the West may increasingly look toward the East.
This region also has a rising superpower in its backyard: China. Asia's No. 2 economy is boosting intra-Asian trade to an unprecedented degree. China's 9 percent growth even gets most of the credit for Japan's return to the plus column. Not bad, considering China's economy is a one-third the size of Japan's.
Much could go wrong, of course. A U.S. dollar crash is but one of the risks facing a region that's still too dependent on exports. Further declines in the dollar would damp Asia's economies.
China is another wild card. If policy makers in Beijing err in their efforts to slow growth and inflation, Asia's outlook would change dramatically. China's efforts to avoid a hard landing are, at best, a work in progress and may include a possible currency revaluation.
Finally, the ``buy Asia'' dynamic coursing through global markets leaves the region in a put-up-or-shut-up position in 2005. It's crucial to continue building a sound economic foundation to underpin the 1996-like construction boom one sees in cities such as Bangkok.
One of the best ways to do that is reduce debt. Asia cut foreign-currency debt and its banks reduced non-performing loans after the 1997-1998 crisis. Yet growth in local-currency public debt in the second half of the 1990s was too rapid for comfort; it went from about 40 percent of aggregate GDP in 1996 to about 65 percent. If Asia uses today's growth to trim debt levels, tomorrow's prosperity will look even better.
Still, this year's rise in stocks is a reminder of how far Asia has come since the late 1990s. It shored up banking systems, improved transparency, unpegged currencies, made central banks more independent and privatized many state-owned assets. Corporate balance sheets are cleaner and a sense of political stability has returned to many countries.
Even Japan is on more stable footing. Asia's biggest economy is still grappling with deflation and its recovery has been less vibrant than hoped. Yet for the first time in a decade, Japan is likely to contribute a bit of growth to the region instead of holding it back.
Throughout Asia there's a ``prevailing cautious optimism that the Japanese economy can resume its uptrend,'' says David Cohen, Singapore-based director of Asian economic forecasting at Action Economics.
It sure does feel like 1996 all over again in Asia. Only this time, the region's economies may be sound enough to keep the good times going.