Rise of the tiger

Step away from the frenzied din on Wall Street and listen: That faint growl is the sound of the Asian "tigers" back on the prowl.

Just 20 months after triggering the worst global financial turmoil in five decades, East Asia is changing for equity analysts from polecat to pussycat.

"East Asia is leading the emerging-market charge long term," says Joshua Feuerman, manager of the Emerging Markets Fund at State Street Global Advisors in Boston.

Despite several uncertainties, most equity markets of the region's erstwhile economic powers have surged so far this year: South Korea up 10.1 percent; Hong Kong, 8.9 percent; and Taiwan, 7.2 percent. "Going forward they will be a tremendous source for growth," says Mr. Feuerman.

The region has been jolted by a 14 percent rise in Japan's stock market this year, by far the region's biggest economy.

But even without Tokyo, there are signs that many East Asian economies could soon begin to run again on their own legs.

After months of seismographic jigs, currencies have stabilized. Sagging economies have bottomed out and show hints of new vigor. Corporations are restructuring, most notably by smashing the practice of lifetime employment through mass layoffs.

And, to varying degrees, governments have begun to dismantle "crony capitalism," or the cozy relations between officials and businesses that led to a disastrous overexpansion of credit.

"If I had sat down and drawn up a wish list a year ago, these are the things I would have asked for," says Mark Headley, a portfolio manager for Matthews International Capital Management in San Francisco.

"These economies are finally stabilizing and equity valuations are still excellent, particularly compared to the US market," says Princeton University economics professor Burton Malkiel. "It's a wonderful time to begin making commitments" in East Asia.

By some accounts, the revival has just begun. East Asia in 1988 accounted for 18 percent of the world's output and a massive 44 percent of the wealth in world equity markets. Last year the region's share of the global economy was 21 percent. But East Asia held just 15 percent of the total value of stocks in world equity markets, says Mr. Headley.

"Investing in East Asia today is like putting money in US companies at the end of the Great Depression," says Feuerman.

South Korea is especially alluring, say mutual-fund managers. (See story at right.)

Still, many uncertainties loom over regional bourses. The financial turmoil was just the first stage of the crisis. Now, as companies throughout the region restructure and cast off inefficient enterprises, governments must cope with a surge in joblessness. In South Korea, unemployment in the past year has jumped from 2 percent to 9 percent.

East Asia's recovery could be threatened, for a while anyway, should US stocks, widely regarded as highly priced, take a severe tumble. Although the region's markets correlate with Wall Street to different degrees, all would suffer if US stocks were to crash, say analysts.

Moreover, some economists worry about continued global financial turmoil and credit contraction despite the current relative calm. Rather than endure a sharp but limited downturn, the world might face a protracted bust following years of excessive business expansion. Such a scenario would especially harm the emerging markets that tend to suffer first in a credit crunch.

Complacency is also a threat to the region. "My concern is now that the economies have seemed to bottom out, officials and executives might sit back and coast, saying 'Why should we continue to restructure?' " says Feuerman.

Finally, economic strains in China and Japan could spread and damage markets throughout the region. China is struggling with an economic slowdown even as it seeks to shake up its huge, laggard state enterprise sector with sweeping layoffs. Japan, the world's No. 2 economy, is showing mixed success in halting an eight-year slowdown that has retarded a regional rebound. (See Japan's mixed message, page 15.)

Indeed, some economists see the current recovery of Tokyo equities as the fleeting result of massive credit injection by the Bank of Japan. A big correction could follow, they say.

Tokyo rode "a sucker's rally staged to improve balance sheets of banks and businesses in time for the end of the fiscal year" on March 31, says Carl Weinberg, chief economist with High Frequency Economics in Valhalla, N.Y.

Because of uncertainties, analysts suggest investors diversify through mutual funds that invest in several East Asian markets.

"Invest in regional closed-end mutual funds that sell at pretty good discounts," meaning the share price is cheaper than the value of the portfolio's underlying assets, says Mr. Malkiel.