Grabbing Asia's Economic Tiger by the Tail
UNITED States Treasury Secretary Lloyd Bensten was in China recently witnessing firsthand the fastest-growing economy in the world. He also has been traveling around the region, which has been booming for the past few years. Yet while Asia's growth prospects remain strong, international investors are beginning to wonder whether they overdid the buying of Asian equities in 1993. Even China cannot ignore the economic laws of gravity, given that very fast rates of economic growth, especially when accompanied by easy money and big foreign capital inflows, usually lead to serious inflationary problems. The longer this is allowed to continue, the greater the risk of a nasty correction.
Last year was truly spectacular for Asian stock markets; many doubled and some did even better. But 1994 is off to a different start. The markets in Malaysia and Thailand have lost more than 10 percent of their dollar values since Jan. 1. The Singapore and the Philippines markets are well down. Hong Kong falls one day and rises the next; volatility is the order of the day.
Local exchange rates add to these risks. As foreign investment pushes up stock prices, it also bolsters the value of local currencies on foreign-exchange markets. When the process reverses, a currency's exchange rate falls with the market.
This was seen clearly in the Kuala Lumpur stock exchange, where a 30 percent rise in share prices in December pushed up the Malaysian ringgit, and a 20 percent decline in share prices during the first two weeks of January led to quick declines in the currency's value. The huge influx of foreign capital made it difficult for Malaysia to handle its money supply, and the government has imposed new regulations to control short-term ``speculators.'' Similarly, in the last 10 days, the Turkish lira has fallen more than 10 percent, triggering a more than 30 percent fall in the stock market in dollar terms.
Most stock markets in developing countries generally have only a limited number of corporations listed. When international investors decide to participate in the expansion of these economies, a veritable flood of foreign money can rush in to buy a few equities. A small investment for a US or British fund manager is usually a big purchase in these markets, and when fund managers worldwide decide to buy equities in developing countries, the amount of money looking for a home can become huge.
For example, in the first nine months of 1993, US investors bought nearly $8 billion worth of equities in emerging markets, compared with $5.6 billion in the whole of 1992 and very little at all in the 1980s. This buying accelerated still further in the last quarter of 1993. While there are no accurate figures of how much new money went into these markets in 1993, about $40 billion went into stock markets outside the industrialized world. US fund managers are now allocating 15 percent of their foreign equity purchases to emerging markets, and this percentage is rising. Against this background, a bubble mentality can easily arise as investors scramble to participate in these markets regardless of the underlying reality of share values.
The good news is that the main forces behind this optimism remain intact; growth rates in developing countries are likely to exceed those in the industrial world for the next several years and by a significant margin. The developing world as a whole grew by 6 percent in 1993, compared with 1 percent in the industrial world, where solid growth in the US was offset by declines in Germany and Japan. The slow growth rates in Organization for Economic Cooperation and Development (OECD) countries are being accompanied by low or declining interest rates, a strong incentive for portfolio managers to range farther afield to improve their returns. This year is likely to show a similar pattern. Growth in Asia is likely to moderate, with China expected to grow at 10 percent rather than 13 percent. Latin America, however, is expected to grow faster than in 1993 with Mexico getting a boost from the North American Free Trade Agreement. For the industrial world, the US once again will be the star performer; it is difficult to see any recovery either in Germany or Japan. The net result is that the overall growth rate will be at least twice as high in the developing world as in the OECD countries.
The fundamental task facing fund managers is how to marry strong economic growth in developing countries to realistic stock market prices. The early investors in the market may do very well, but prices cannot double every year, even with 6 and 7 percent increases in gross domestic product. Foreign investors are introducing the type of price volatility to emerging markets that has become common in the world's principal foreign-exchange and bond markets. Just as investors in these markets buy and sell in large volume, creating big swings in prices, waves of enthusiasm for the Far East will be followed by a rush to undiscovered markets in Latin America. A good example is Venezuela, which last year was one of the few emerging markets to fall and is now recovering strongly.
The past year has opened the eyes of more and more investors to opportunities in developing countries, and the outlook is good. The problem: Many investors are new to these markets, so these funds are likely to be fickle and highly sensitive to poor performance. Successfully managing these funds will be no small test of skill, especially as the scale of investment grows ever larger. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.