Forget your preconceptions about Asia ' the Old Asia that went for growth over profitability, size o...
Forget your preconceptions about Asia ' the Old Asia that went for growth over profitability, size over quality. After all, corporate Asia and the providers of capital to them learned that Western methods were usually superior to the 'Asian Way' in the Asian Crisis of 1997/98.
Since that time Asia Inc has closed down loss-making plants and diverted capital from crony or group affiliate white elephants to new, exciting ventures.
The market for capital is getting to work ' punishing the losers and rewarding the winners. Bull markets in stocks such as Huaneng Power (HNP ADR in US dollars) have been almost uninterrupted, while the inefficient that arguably should never have been in existence, have been punished, such as Chartered Semiconductor in Singapore.
Slowly but surely, capital structures are beginning to improve. Dividends are being paid when a company's management cannot find a better use for the cash. 7% yields in Singapore where three month deposit rates are well below 1% are not uncommon. This is all logical, textbook stuff.
The end result is that leverage, (debt) which had risen to dizzying levels in the mid to late 1990s has fallen. A visible measure of this is the banks Loan to Deposit Ratio (LDR), which measures how much bankers have lent for every $1 of depositors' money they have received. After peaking at over 110% (in other words, East Asian banks lent out $110 for every $100 of deposits received) the ratio dropped to the mid-70s range in 2001/02 and is just beginning to recover.
Even corporate governance does not look too bad relative to the rest of the world, since the 'bull market' in corporate shenanigans is, of course, sensitive to the economic cycle and liquidity.
The bottom line for Asia is, valuations are cheap (price to book is at the bottom of the 20+ year range), debt levels are low and profitability is rising (though many sectors will get hit by the Sars outbreak this year).
It is ironic, therefore, that the rest of the world did not notice any warning signs from the Asian crisis. The realignment of exchange rates and new-found competitiveness of Asia led to further advances in deflationary forces. The Federal Reserve injected copious liquidity to help the banking system as the Asian crisis ran into the emerging markets/Russian/LTCM hedge fund crisis. But this inflated the bubble and its accompanying frauds, aggressive accounting and debt orgy further, necessitating the painful adjustment we have seen in this bear market.
Much heavy industry and light manufacturing have found no pricing power since then (for example, US automakers). Debt levels in both Europe and America are at alarmingly high levels.
In fact, the two biggest negatives for Asia at present are the Sars outbreak and the drag from the gloomy economic outlook for the rest of the world.
In the short term we must not underestimate the negative impact from Sars ' the pneumonia-like disease that has hurt the high population density 'hub cities' ' Hong Kong and Singapore in particular. Transport and tourism are being devastated and many of these firms have high fixed-cost bases.
The other bugbear is the economic ties between East Asia and the US. So if the US continues to struggle, many will argue it will be difficult for Asia to decouple ' it rarely does so for any lengthy period of time.
However, the rise of the domestic consumer in Asia (a new force for economic growth) and the reduced levels of debt have changed the characteristics and behaviour of Asian financial markets.
In fact, 'implied volatility' for Hong Kong's Hang Seng index as measured by the options markets has fallen since 1997/98 from one of the world's highest to a low level, which is broadly comparable to where Germany's Dax index was in the late 1990s. It is the Dax that now has a high-implied volatility, having risen to levels broadly comparable to Hong Kong's of old.
Asia is no longer the risky bet, the warrant on global liquidity and the risk premium. Go to Germany for that.
Asia is now for the traditional investor looking for dividend yields, low valuations and corporate management trying to improve efficiency and corporate profitability the hard way.
I know which I would prefer if the spectre of deflation keeps looming over us.
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