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Californians should have sympathy for the economies of Asia, which recently have been battered by a credit and currency crisis. The stock markets there have suffered, and investors fear that troubles in Asia could trigger a worldwide recession. It wasn’t all that long ago, no more than five years, that economists were saying similar things about California. Our state government was running a deficit, home prices were deflating so quickly that homeowners were going broke, and people were fleeing the state. California would never again be the Golden State.
But those of us who have lived in California for a while knew better. Our economy can be cyclical, but we are a state of well-educated, energetic, ambitious people supplied with ample resources. We recover. Downturns simply present the chance to buy real estate at bargain prices.
Arthur Q. Johnson, a certified financial analyst with Brandes Investment Partners, says the situation in Asia is similar.
"From 1985 until 1995, Asian economies for the most part maintained an export-led focus for growth. By pegging or aligning their currencies with the U.S. dollar among other perceived stable denominations, Southeast Asia was successful at increasing its exports to and attracting direct foreign investment from established industrial economies such as Japan and the United States, who were anxious to relocate their factories to low-cost places."
Fixed exchange rates coupled with low labor costs gave Asian economies a competitive edge in the global marketplace.
"The result was a decade of double-digit economic growth," Johnson says. "Annual increases in gross domestic product in most Southeast Asian countries were two to three times as great as the more mature industrial economies."
But the international rush to lend money in Asia meant lax supervision by local governments, weaker credit standards and rising risk, explains Johnson.
"By 1996, many of the rapidly growing export-driven economies of Southeast Asia were now running current account trading deficits because their exports were no longer price-competitive. The central banks in Southeast Asia were forced to let their currencies decline from the value of the U.S. dollar or 'free-float' in order to realign their trade imbalances and return their economies to a more normal state. This free-floating of currencies has made it harder for businesses that had borrowed in foreign currencies to repay loans, further weakening the banking system of many affected Asian nations."
It is an economic mess, but there is a positive side.
"First of all, by free-floating their currencies, Southeast Asian economies will be more competitive with their trading partners and able to export a larger share of their manufacturing base in the future. Secondly, the deregulation and restructuring of Southeast Asian industries that were once closed to foreign ownership and competition will lead to leaner and more profitable businesses with an outlook for maximizing shareholder value. Lastly, with a renewed focus on banking regulations and capital requirements in the region, Southeast Asian economies will be left to grow and prosper while the banks prudently move money from the savings sector to business investment. Similar financial and economic volatility was experienced three years ago in Mexico, which is currently experiencing a level of economic growth and stability that is the direct result of free-market reforms," says Johnson.
"For the past 10 years it has been difficult to purchase Southeast Asian businesses at reasonable prices in relation to earnings, assets and cash flow due to the expectations for sustained growth," he notes. "At this time, as share prices fluctuate wildly, we are finding many businesses to be attractively priced and may consider increasing our allocations to Southeast Asia as the opportunities present themselves."
The accounting firm of Ernst & Young, in its Global Outlook for 1998, agrees:
"Long-term growth prospects remain bright. Foreign investors would not be wrong to view the situation as an opportunity to buy into the world's most promising marketplace and often at bargain prices," writes Ernst & Young.
In Japan, Hitachi Ltd. appears to be a value investment in the classic sense. A widely diversified, high-tech manufacturer, Hitachi is selling at about half its 52-week high. If calculations are correct, Hitachi also is selling at less than its asset value. Korea Electric Power Company, 75 percent owned by the government of South Korea, is another regional stock worth studying. The risk with any Japanese or Korean shares is that it may take time for the rebound to come. These are not stocks for risk averse investors or for those who seek quick profits. Both companies trade on the New York Stock Exchange. (Note: The author does not recommend stock for purchase. Further investigation is suggested, and readers should make investment choices based on their own temperament and needs.)
Investors interested in Asian economic issues, corporations and stock exchanges will find these Web sites helpful: Far Eastern Economic at Review at www.feer.com; Morgan Stanley Global Economic Forum at www.ms.com/gef.html; Trader's Haven, a site with links to sites from 76 countries at www.tradershaven.com.
Janet Lowe is author of several investment books, including "Value Investing Made Easy" (McGraw Hill) and "Warren Buffett Speaks" (John Wiley & Sons).
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