It is now over two years since the devaluation of the Thai baht precipitated a currency crisis acros...
It is now over two years since the devaluation of the Thai baht precipitated a currency crisis across south-east Asia. As we all know, the following few months were punctuated by sharp rises in interest rates and tumbling equity markets, as companies throughout the region struggled with the escalating costs of huge overseas borrowing.
However, times have changed and the worst appears to be over, as highlighted by the 27.1% rise in the FT/S&P Pacific (ex Japan) Index in sterling terms since the start of the year.
So what has changed? As interest rates began to tumble elsewhere in the world, the central banks of south-east Asia felt able to reverse their policy of aggressive fiscal tightening and focused on an easing of monetary policy, implementing a series of interest rate cuts. Importantly, currencies were firm throughout this process, which suggested the falls in interest rates were sustainable.
As interest rates have declined, we have seen genuine evidence of corporate restructuring. Government policies to address issues in the beleaguered financial sector, coupled with a focus on the problem of bad loans, have combined to result in the successful recapitalisation of banking systems throughout the region.
Non-performing loan ratios have also started to fall in problem countries such as South Korea.
Indeed, corporate restructuring is now being embraced across the region, resulting in tremendous scope for unexpected earnings surprises going forward. This, combined with the shoots of economic recovery which are now evident, should result in a period of sustained strength in Asia.
Within the region, Singapore has been one of the shining lights since the turn of the year and looks set to preserve that mantle. The slowdown in economic growth which befell its neighbours was less pronounced in Singapore, and hence its recovery has evolved at a quicker pace. This was no where better highlighted than in July with the announcement of strong non-oil export figures, taking exports to a level not seen for nine months.
The outlook for the region should remain positive, however, its equity markets can be fragile creatures at times. The region, and Hong Kong in particular, have historically taken their lead from US interest rates and if these were to rise sharply in the coming months then markets may find themselves under pressure.
Similarly, the current military tension between China and Taiwan is also a cause for concern and may become a key issue in the region's development if the "mini-crisis" escalates in the coming months.
That aside, the recent recovery and increase in corporate activity across the region should bode well for the future.
Neil Rogan is head of Far East Desk at Gartmore Investment Management.
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