Two years ago, Asia’s economies went from what some saw as an economic miracle to near collapse. Financial Editor Ian Fraser examines how the east is finally rebuilding its strength — and taking on the world
The 1990s have largely been the decade of south-east Asia. Until two years ago it was the region that could do no wrong. Its fast-growing economies – the Asian tigers – became a honey pot for investors. Then the miracle turned into a mirage.
The collapse of the Thai currency, the baht, in July 1997 sent shock waves throughout the region and cast a carapace of gloom that spread as far as Europe. Asset markets collapsed, banks failed, bankruptcies were widespread, the government of President Suharto in Indonesia collapsed, and investors had their fingers severely burnt.
Country after country suffered economic collapse as a “domino effect” swept through the region, and Asia’s so-called economic miracle appeared to have been built on shaky ground. “Asian values” – meaning hard work and strong family values under an authoritarian regime – were dangerously undermined.
One of the first to predict it was the American economist Paul Krugman, who noted: “The crisis was brought on by financial excess. The Asian story began with excessive risky lending by unregulated financial intermediaries. This created inflation of asset prices, and then the bubble burst.”
Two and a half years on, the region is reawakening from economic depression. Having learnt some important lessons – economic, political, environmental and social – the Asian tigers are rebuilding their strength to roar once more.
Next year, growth in Asia (excluding Japan) is expected to return to its early-1990s level of 7%. Perhaps the most important lesson is that old-style “crony capitalism” is out of step with the electronic age – a conclusion at odds with Malaysian prime minister Mahathir Mohammed’s declaration that the “free-market system has failed”.
Investors who timed their entry into south-east Asia at the low point of economic confidence in the region – early 1998 – have made some spectacular gains. However, they should be prepared to face another roller-coaster ride ahead. A lack of quality new flotations or share issues and uncertainty about US interest rates are causing uncertainty.
The Pacific Rim countries have lived through one of the fastest industrial revolutions in history. In a couple of decades, the region’s economies went through a modernisation process that took the United Kingdom 150 years to achieve.
The emergence of new technologies enabled countries such as Singapore, Malaysia, Thailand and the Philippines to leapfrog whole stages of the industrial revolutions that had been experienced elsewhere. “It is not uncommon for Asian men and women to move straight from working in the family’s paddy fields to a factory producing microchips” said Victor Mallett, writing in The Trouble With Tigers.
Jim Anderson – fund manager of the Pacific Assets investment trust, managed by Edinburgh-based Friends Ivory and Sime – is a former resident of Hong Kong who has lived through the region’s recent ups and downs.
“The collapse of the Thai baht and its knock-on effects revealed that many economists’ assumptions about the region were clearly wrong. We had no premonitions of the crash,” he says.
Like many other emerging market investment funds, Pacific Assets suffered both falling asset values and collapsing currencies. Even the most astute fund managers would leave shareholders with a loss.
Between 1996 and 1998, the value of the Pacific Assets’ investment trust plunged from about
£240 million to less than £80 million. The trust was caught out by being overweight in Thailand – but, adds Anderson: “Thankfully, we had no money invested in Indonesia. I am not confident with it either economically or politically.”
Anderson says he persuaded his board to put a special derivative in place to hedge the fund’s exposure to the Hong Kong stock market. This protected Pacific Assets shareholders from a potential loss of around £20 million. “It was a nervous time for me,” admits Anderson.
Things have since picked up for Pacific Assets.
It delivered a net asset value total return of 100.9% in the year to September 1999, compared to a sector average of 67%. This means investors who bought the shares in September 1998 have doubled their money. This was recognised when Anderson and his team of Hong Kong-based stock-pickers won an Association of Investment Trust Companies award for the best-performing investment trust in emerging markets (excluding Japan).
Today, the Pacific Assets trust is 46% invested in Hong Kong, with other investments in Taiwan, South Korea and Singapore and a minimal presence in Malaysia, Thailand and the Philippines. The trust has a strong bias toward investing in industrial and financial services and utilities companies.
This marries with Anderson’s wariness of south-east Asia’s new breed of internet start-ups.
“We would prefer to invest in a telecoms company with an existing network and subscriber bases. Real companies make money rather than having an infinite price-earnings ratio. It’s only since the start of December that internet mania has really caught people’s imagination. But to go overweight in such stocks is not a sound strategy. We have told shareholders we are not prepared to play that game.”
The biggest political changes to affect the region in recent years have been the handing back of Hong Kong and Macau to Mainland China. The Hong Kong handover could not have gone more smoothly for investors. Anderson says he is very impressed so far by China’s approach to the government of the former colony.
“The Chinese have done everything that was asked of them,” said Anderson. “The true test is that, when there was meltdown in the banking system around the region, they took the decision to save the Hong Kong banking system and gave authority for the Hong Kong government to intervene in the stock market But one thing that is consistently being debated is the rule of law and who has the final say.”
This article was published in the Sunday Herald on 26 December 1999