Not So Fast: Collapses on This Scale Take Years to Reverse

I confess: I'm tired of Asia. It has turned into one long, boring disaster movie with no heroes--just a lot of dazed, pathetic characters milling among exploding markets and empty skyscrapers.

When Thailand tried its "controlled" currency devaluation nearly one year ago, it was the equivalent of going to the doctor for a sore throat and finding out you have terminal cancer: Given the chance to see Thailand's overbuilt, debt-ridden economy in a harsher light, investors were horrified.

By fall, the scene would be repeated in Indonesia and in South Korea, two economies of far greater importance and with far bigger problems. With those dominoes down, Hong Kong, Singapore and Malaysia now totter. Japan is a basket case all its own.

And China, as they say, is "out there."

I had the opportunity to visit Singapore, Hong Kong and Beijing last October. One word kept sounding in my head: "Bubble!"

East Asia had long been lauded for its high savings rate. On top of that money, there was plenty of foreign capital breaking the doors down to invest in the region in the mid-1990s.


But too much money can be as bad as too little. East Asia built capacity--in manufacturing, retail and office space--for a perpetual boom. There is no such thing.

We know that all too well in Southern California. "Bubble" was the same word that kept sounding in my head when I moved to Los Angeles in January 1990 from the East Coast. I was stunned by the prices real estate agents insisted were "reasonable" for homes here.

They were not reasonable. But the market would take care of that problem.

And so the market is taking care of East Asia's problems. This is not the end of the world as we know it. As James Flanigan notes elsewhere in these pages, the region is being forced to reinvent itself and will. Two billion people just don't disappear, barring interaction with an asteroid or other large object.

But what about investment opportunity? That question has come up repeatedly over the last year as Asian markets have collapsed. "Isn't it time to buy?" many U.S. investors have asked, eager to make a killing on a potential fast turnaround.


Let's look at the record, using as a proxy the Asia Pacific Fund (ticker symbol: APB), a closed-end stock mutual fund that invests across the region:

* July 1997: Thailand devalues. APB ends the month down 3%, at $11.94 a share. Some people think the worst is over.

* September: The situation worsens in currency and stock markets across Southeast Asia. APB finishes the month at $10.75, down 10% from the end of July.

* October: Rumors of Hong Kong devaluation trigger new market meltdown. APB closes at $8.50.

* February: After diving as low as $7 in January as Indonesia's currency collapses, APB bounces up to $9.19 as Asian markets stage a rally.

* May-June: The economic outlook worsens again across the region, as bankruptcies soar and civil unrest rips Indonesia. APB plunges anew, closing Friday at $6.19--roughly 50% of its price a year ago.

Clearly, there has been no fast turnaround in Asia. There won't be.

The optimists had been focused on Mexico's case history. Burdened by rising debt and a widening trade deficit, Mexico was forced to devalue the peso in December 1994. Mexico, too, thought it could control its devaluation. The market had other ideas, slashing the currency's value by 50% in a matter of weeks and sending the economy into a deep recession.

But Mexican stocks hit bottom quickly. After tumbling 45% between Dec. 1, 1994, and March 1, 1995, the market soared 90% by year-end 1995 and 21% in 1996.

Mexico, however, had Yankee money to help it. Investors were willing to go back to Mexico in part because the U.S. Treasury stood behind the Mexican government. What's more, corporate America already had too much at stake in Mexico to let its investment wither.

The International Monetary Fund is trying to stand behind Asia, but investors obviously now have far less faith that the IMF's bailouts for South Korea, Indonesia and Thailand will work--or at least, will work quickly. The problems of overcapacity, severely weakened businesses, high debt levels and devastated consumer purchasing power cannot possibly be fixed in a hurry.

Consider our own situation in Southern California since 1990. The real estate collapse took place over four years: Research firm Dataquick says the median price for Los Angeles County homes peaked at $203,000 in May 1991. The bottom was reached in February 1995, at $158,000.

The recovery since then has been strong enough to lift the median to $183,000 as of April, up 16% from the low. But we're still 10% below the 1991 peak.

We are far better off, in economic terms, than Asia. Yet look how long our painful recession lasted.

"They'll export their way out of it," experts say of Asia. Yes--but they'll fight for market share with every other region of the world. Over the last 10 years, every nation has viewed exports as the path to riches, or at least to being less poor.

Meanwhile, there's Japan. Its domestic economy has mostly been in recession or near-recession since 1990. Japanese consumers are scared to death. The stock market is 61% below its 1989 peak. I'm reminded of what experienced investors say about individual stocks: "Sometimes they don't come back." Maybe Japan won't come back. (Portugal, too, was once an economic power. So was Greece.)

Are there investment bargains in Asia? Of course. And major U.S. multinational companies like General Electric, Travelers and Hewlett-Packard are finding them and buying them. If you want to invest in Asia, invest with them.

Here are two telling statistics from Lipper Analytical. Average return of U.S. stock mutual funds since 1978: 2,126%. Average of international stock funds: 1,342%. You took more risk overseas but earned less. Something's wrong.


Tom Petruno can be reached by e-mail at

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