The Asian recovery is sustainable due to restructuring and an end to protectionism, according to Fle...
The Asian recovery is sustainable due to restructuring and an end to protectionism, according to Fleming Asset Management (FAM
While return on capital invested in the US has been increasing, this has not been the case in Asia until now. Pegged currencies, the protection of domestic industries and banks from foreign competition and crony capitalism have all been responsible for holding back performance in the past, the group said
Rick Schmidt, fund manager at FAM, said: "There has been a major change as a result of the crisis. The IMF has laid down measures, which have been adopted, so the pegged currencies have gone for good, with only Malaysia, China and Hong Kong remaining. "Domestic industries are no longer protected, while foreign banks have been introduced into the system. There has been major political change in leadership throughout the regions: there will be no return to the old ways now
Singapore is a clear example of the sea change, with the government-linked companies (GLCs), which control the majority of the country's industry, radically restructuring. Operating businesses are being consolidated until six of the nine GLCs are restructuring, and three of the nine CEOs have been replaced. Two of the new CEOs are foreigners Schmidt added
The changes are not at the same level for every country and every company. In Korea, the banking sector got off to a good start by sacking a third of employees and replacing every single bank president in the top 12 banks, according to FAM. Thirteen out of 26 commercial banks have either been merged or nationalised
A significant recovery in the stock market has lifted the immediate pressure to reform and politics is once again intervening. A deal with HSBC fell through when the government re-evaluated and raised the price of HSBC's target, Schmidt said
Schmidt admitted that there will be setbacks to the restructuring. He said that if the region follows the US pattern of the 1990s, where return on capital has grown consistently since controls on multi-state banking and telecom operations were lifted, then Asia could achieve the same result
Despite the recovery this year, Malaysia is still 61% off its 1997 peak in dollar terms, while Thailand and Indonesia are around 70% to 80% down. For Asia to return to its pre-crisis returns of 12% return on equity within the next five years, earnings would have grow at 30% per year. Even if Asia takes 10 years to recover, said Schmidt, earnings would still grow at 14% a year
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