U.S. May Be Shielded From Asia’s Woes

For most of the last few years, the growing consensus on Wall Street has been that it would take a big shock to end U.S. stocks’ long bull market--some kind of dramatic and unexpected event that would stun the global economy.

Could the current financial crisis in Asia, which began with the equivalent of a fire in Thailand’s small and relatively unimportant markets last spring, be such an event?

That question took on more urgency Thursday in the wake of the steep plunge in Hong Kong’s stock market, which then spread worldwide, pounding stocks from New York to Frankfurt to Buenos Aires.

Hong Kong is the latest--and the biggest--Asian domino to fall as global investors have yanked billions of dollars in capital from the region in recent months, apparently convinced that what was once touted as the “Asian economic miracle” is now a bust--a victim of growing trade deficits, burdensome debt loads and overbuilt real estate markets in many Asian countries.

As money has left Asian markets, what has been left behind are deeply devalued currencies, soaring interest rates, devastated stock markets and the virtual certainty that economic growth will slow drastically across the region.

“What is developing is a quasi-recessionary environment for the whole region,” said Allen Sinai, chief economist at Primark Decision Economics in Boston.

That may have important implications for the California economy, whose fortunes depend to a significant degree on ties to Asia.

Yet many experts doubt that even a marked economic slowdown centered in Southeast Asia can seriously depress economic and stock-market activity in the world as a whole.

Currency devaluations--the heart of the crises for many of the countries involved--have occurred elsewhere in the world in the 1990s, including Mexico in 1994, without triggering global recession. That is partly because such devaluations bring economic advantages as well as disadvantages to the affected nations.

What’s more, in the huge global economy, when money flows away from troubled markets it may simply flow into healthier ones. U.S. and Latin American stock markets, for example, are believed to have benefited in recent months as capital has fled Asia.

As many economists add up the numbers, most don’t believe that the turmoil in Southeast Asia will have more than a nominal effect on the U.S. economy’s pace of growth.

Exports account for about one-fifth of U.S. economic activity, or gross domestic product. That means about 80% of the American economy’s output is consumed within U.S. borders and thus is dependent on domestic demand.

Also, the hardest-hit Southeast Asian countries take only about 2% of total U.S. exports, Sinai estimates. Canada, Mexico, Europe and Japan are far bigger consumers of U.S. goods and services.

Thus, even a sharp drop in demand for American exports in such weakened economies as Thailand, Malaysia and the Philippines--whose consumers and companies have lost 20% to 40% of their purchasing power as their currencies have plunged--amounts to a minuscule effect on U.S. GDP.

Brokerage Morgan Stanley, Dean Witter estimates that even a “major” shortfall in Asian economic growth overall would shave just 0.25% from real U.S. GDP growth that the firm now expects will be about 3% next year.

California, however, may suffer disproportionately as a key gateway to Asia and a favorite second home for Asian immigrants.

“California is the No. 1 exporter in our country to ASEAN [Assn. of Southeast Asian Nations],” explained Ernest Bower, head of the U.S.-ASEAN Business Council, which represents 450 U.S. firms operating in the region. “You’ve got more to lose and also more to gain.”

The brunt of the pain so far has been felt in California’s engineering and design community, where firms dependent on the building of dams, bridges, railroads and ports have seen projects slowed down or put on hold by Southeast Asian governments under pressure to cut their spending.

At the same time, there are benefits to U.S. companies, and the U.S. economy overall, from the turmoil in Asia.

For one, the region’s devalued currencies mean that exports from the region are significantly cheaper for U.S. consumers. Thus, Silicon Valley firms dependent on Southeast Asia as a low-cost manufacturing base have seen their costs drop dramatically.

But many of those companies also import key components from the United States, and those costs have risen sharply.

“At least in the short-term, everybody seems to be impacted in one way or another,” said Jeremy Potash, executive director of the California-Southeast Asia Business Council.

Still, with regard to the United States as a whole, many economists do not believe that Southeast Asia’s woes will result in a meaningful hit to economic growth or corporate profits--the fundamentals that in large part determine the stock market’s value.

“Six months from now this won’t be a story at all” in terms of the U.S. economy, said John Williams, economist at Bankers Trust Co. in New York.

There are, however, other concerns that make this spreading crisis more worrisome than Mexico’s in 1994.

First, two far bigger dominoes could conceivably begin to teeter: Japan’s weak economy, which is on the hook for billions of dollars in bank loans to now-struggling Southeast Asian countries and companies; and China’s economy, which obviously has close ties to the rest of Southeast Asia and is also directly affected by any change in fortunes of Hong Kong.

In China’s case, in particular, anything that sours investors on the region--and potentially impedes China’s ability to raise capital to modernize its economy--also threatens the global economy.

Nonetheless, far more important to the outlook for the U.S. economy and stock market, most analysts say, is what’s happening in the North American economy, including Canada and Mexico. And on that front, the news still is exceptionally good.

With consumer demand strong, inflation very low, business inventories lean and interest rates moderate, the $7-trillion U.S. economy “has too much going for it” to be affected much by Asia’s turmoil, Sinai said.

Even so, economists warn, what is unmeasurable in terms of its potential effect on U.S. stock prices is the psychological fallout from Asia’s problems on investors around the world.

“Many stock markets around the world, including our own, are at fairly lofty levels,” Williams noted.

After surging for nearly three years, U.S. share prices relative to underlying corporate earnings are at levels above even where they were before the 1987 stock market crash.

In terms of investors’ view of stocks’ worth, “there is a more ebullient mind-set now than I can ever remember,” said money manager David Dreman of Dreman Value Management in New York.

That is true not just in the United States but also in many European and Latin American markets, most of which have soared this year even as Asian markets tumbled.

The question is whether investors in Western markets could be driven to dump stocks not because of a change in economic fundamentals or interest rates but simply because they fear that their high-flying markets might be next in line, as one after another Asian stock market tumbles.

“When you see a bubble pricked elsewhere, it makes you fearful that it could happen to your own market,” Williams said.

With far greater numbers of individual investors in the U.S. stock market today than five or 10 years ago, the risk is higher that a continuing plunge in stock prices could quickly cause consumer demand to dry up, as people simply feel poorer.

“I don’t think there is any question that the greater threat to U.S. economic performance is the risk of a significant decline in the U.S. equity market,” said Adam Posen, research associate at the Institute for International Economics.

Yet analysts also note that the 7-year-old bull stock market has faced many challenges along the way, including several much more frightening than the current Asian debacle appears to look, at least from U.S. shores.

The Federal Reserve Board’s moves on interest rates, for example, have always worried U.S. investors more than events overseas.

Yet even when the Fed’s actions have scared investors in the 1990s, they have not been inclined to push stocks dramatically lower or to let them decline at all for very long.

The Dow Jones index has yet to suffer a decline worse than 10% since this bull market began in October 1990.

Has the bulls’ luck finally run out? “I think we’re closer to the end of [stocks’] euphoria than to the beginning,” Dreman said.

Yet a pullback as severe as 20% in the Dow from its peak of 8,259 reached in early August would merely leave the index at 6,600--where it was in mid-April.

And even Dreman finds the long-term outlook for the U.S. economy too appealing to suggest that any market decline that may lie ahead should worry long-term investors.

“If I were holding stocks with at least a five-year [horizon], I wouldn’t try to get out of this market now,” he said.

* COPING WITH CRISIS: Hong Kong’s new government faces its first true test. D1

* MARKET SHOCK WAVES: Questions and answers about how U.S. will be affected. D1