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As Japan goes, Asia goes
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October 14, 1998: 4:49 p.m. ET
Asia's market meltdown began with the Thai baht, but will end in Tokyo
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NEW YORK (CNNfn) - For the first time in more than 14 months, investors may be tempted to look again, albeit warily, to Asia's emerging markets.
Buoyed by a resurgent yen, lower interest rates and a landmark deal to bail out Japan's debt-saddled banks, market strategists say they can finally discern a few hopeful sparks amid the ash heap of Asia's burnout.
Yet far from a clarion call to bullish investors, this recovery is loaded with caveats -- the largest being Japan, the world's second-largest economy and Asia's biggest economic basket case. The last Asianwide market rally, back in February, sputtered quickly when Japan failed to inspire the requisite investor confidence to keep the momentum going.
Still, rumblings of recovery can't be denied:
On Thai currency markets -- the scene of the crime that drew first blood among Asia speculators -- the baht is wobbling back to its feet. In Indonesia, the rupiah, though still groggy, is looking more robust, despite lingering threats of a clampdown on capital controls by the country's chief economic minister.
And in Korea, where officials successfully applied to the International Monetary Fund for a multibillion-dollar rescue package to roll over short-term debt, investors are feeling more emboldened these days.
Some even argue that the averted collapse of a troubled U.S. hedge fund last month may actually help Asia by making banks more cautious about lending.
"We're near the end of this first big downleg, and the next big period is a recovery period" in which we'll see stabilization, lower volatility and "a base building if you will," said Michael Goodson, an Asian equities strategist with Salomon Smith Barney.
The first sustained rally in months
In its first sustained rally of its kind in over a year, Hong Kong has jumped 19 percent since last Wednesday. Meanwhile, shares in Kuala Lumpur, Bangkok, Seoul and Singapore also rose, partly on diminishing fears that Hong Kong will abandon its U.S. dollar peg, or that the Chinese will devalue the yuan. Tempered enthusiasm over Japan's apparent bank breakthrough also played a role.
Yet while Asian markets may suddenly appear more investor-friendly and less risky, Goodson and others warn that mild rebounds in Korea, Thailand, Indonesia and Taiwan do not an Asian comeback make.
Japan needs to step up
The only real insurance against a regional backslide into the financial inferno, fund managers say, is an ironclad commitment from Japan to tackle its own economic demons.
With market neurosis being what it is today, nothing short of the Mother of all mea culpas from Japan -- a formal acknowledgment that it has the lion's share of responsibility for causing and curing Asia's woes -- may suffice to placate jittery investors.
Most economists point to the collapse of Japan's vaunted "bubble economy" in the early 1990s as a watershed event that exposed the crony capitalism, petty corruption and bloated banking system that has bedeviled the entire Pacific Rim, hindering recovery.
With this history in mind, many fund managers barely batted an eyelid at the lackluster market reaction to Monday's deal by Japan's parliament to inject $361 billion into its ailing banking sector: Tokyo stocks plummeted more than 2 percent Tuesday, giving back a 5 percent prior-day surge generated by the initial news of the agreement. Singapore, South Korea and Taiwan all slumped; Australian stocks lost 0.52 percent of their value.
"Japan still has some very serious problems," said Rosemary Sagar, the managing director of U.S. Trust. "Liquidity is awfully scarce, Japan is just so stretched in terms of its finances."
Or, as Douglas Johnson, a Global Strategist with Merrill Lynch Asset Management, put it: "The markets are unlikely to reward Japan for getting its act together…It's unlikely the rest of the region will begin to work for us, until Japan begins to work for us."
Most markets have already hit bedrock
Over the past month, Sagar noted, the Thai market has risen about 44 percent in U.S. dollars, while Singapore has bounced 20 percent. But in many cases, she added, these markets had already hit virtual bedrock, making any recovery a relative phenomenon. For awhile, Thailand's GDP had shrunk to the point where it was on a par with Morocco, a country a fraction of its size.
(Through September, Thailand's market had shed nearly 17 percent of its value since Jan. 1, while Singapore skid about 40 percent.) Other Southeast Asian countries have suffered similar, or far worse, losses.
Source: Salomon Smith Barney
As for Japan, its fundamentals have continued to deteriorate, according to the latest Global Overview by Salomon Smith Barney. Salomon has downgraded its estimates for Japanese GDP this year and next to -2.4 percent and -0.4 percent, respectively. Bankruptcies, the report noted, have risen more than 20 percent over last year.
Malaysia, meanwhile, has earned the dubious distinction of being the scourge of regional reformers. There, Prime Minister Mahathir's professed aversion to Western-style market reform has jeopardized a recovery, though most experts point out the country is known for quicksilver about-faces in economic policy.
A recent prognosis report on Malaysia by Santander Investment was entitled, "Disaster Scenario Builds."
As for Japan, Salomon Smith Barney concluded: "In this environment, recommending the Japanese market seems foolhardy. At some point as the fundamentals start to bottom, the time may come to buy the market. For now, we would encourage investors to focus on individual stocks."
This might mean limiting oneself, for the time being, to Tokyo's "Top Ten" companies, Nikkei behemoths such as Canon, Hitachi Zosen, Mitsubishi Electronics or Sony -- all of which are forecast to benefit from sluggish, if steady, earnings growth over the next year.
Because the exodus of overseas investors from Asian markets has been so great, most of the reinvestment in Asian markets, when it comes at all, is a local phenomenon.
"The foreigners are totally out of the markets," Sagar said. "What we need to see first is some of the locals going back to the markets…that's what we sort of see in Thailand right now, it seems that the locals are nibbling."
Stay away from financial stocks
When Asia's emerging markets begin living up to their name again, Sagar said, the old conventions may change: "The old blue chips are not going to be the winners of tomorrow. Even now in the Thai market, the biggest companies are pretty much the banks, but that's not what you really want to own in the future." Sagar, for her part, owns stock in BEC World, Thailand's biggest broadcaster, and a rising star in Asian equity markets.
To help shore up future equity growth, Japan's Ministry of International Trade and Industry has, in a departure from precedent, become a lender of late to Japanese expatriate companies throughout Asia. The idea is to help recapitalize the firms so as to provide a base of support once recovery resumes in earnest.
"For them to get into the loan business is somewhat unique," William Farrell, the president of Dynamic Strategies/Asia. said of the Japanese trade ministry. "They're trying to provide loans mainly to make sure that the Japanese companies don't leave…They want to be behind the power curve over there."
In order for Japanese reform to succeed, however, consumers will have to begin spending again -- and heavily. For a culture weaned on an ethic of saving over spending, persuading consumers to loosen the purse strings may require a Herculean shift in attitudes inculcated from childhood.
"Psychologically, it's very important," said Farrell, noting that Japan accounts for two-thirds of Asia's economy. "Japanese consumers are sitting at home with cash stashed under the mattress or under the futon…Once they feel confident again, they will start spending."
Even assuming Japan shows a new resolve in overhauling its banks -- whose debt is said to soar as high as $1 trillion -- other major stumbling blocks remain.
Bankruptcy and financial disclosure laws across the region are nebulous at best, and non-existent or unenforceable at worst. Should the Hong Kong dollar peg suddenly snap - a not-so-remote possibility now that Hong Kong already intervened once last summer in the market to scare off speculators - or should China devalue the yuan, either move could rattle investors scouting for an Asian safe haven.
A mainland Chinese firm goes under
At the same time, signs of a slowdown in America, Europe and South America, where Brazil is clamoring for a $30 billion cash injection, could impede recovery in Asia. Even in China -- which has remained largely aloof from the current crisis -- the collapse of a mainland holding company in Guangdong last week has ratcheted up the anxiety level.
In the United States, meanwhile, struggling corporations consistently scapegoat Asia for their mounting profit woes. In the latest such recrimination, Bell Atlantic said it planned to take third-quarter charges that would wipe out earnings. The company cited fallout from the Asia crisis.
Charles Hill, the Director of Research at First Call, a Wall Street agency that tracks corporate earnings, said recently he saw ominous signs in recent profit warnings from such heavyweights as Coca-Cola (KO), Gillette (G) and Procter & Gamble (PG).
"They were the first ones, those types of companies, to warn a year ago when things hit Asia, so I think that's a problem," Hill said.
Pending a clearer picture in Asia, Johnson, at Merrill Lynch, said investors should take a conservative tack.
"Look at how you want to be positioning yourself for a rally," he said. "Obviously, it's in everyone's interest to keep your feet in the water. But investors in general aren't going to get paid to be the hero in this environment…I'm perfectly happy to surrender the beginning phases of a rally."
--By staff writer Douglas Herbert
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