Asia Moves Back From the Brink--and Beyond the S

An encounter with an Army patrol outside Bangkok this spring left money manager Eugene Sit with an indelible image of Thailand’s determination to regain its competitiveness after two years of financial crisis.

The lead vehicle in the column flew a three-star flag, indicating a general officer.

What impressed Sit was that, as a belt-tightening move, the soldiers--general included--were traveling not by car but by bicycle.

The overall message Sit took away from his visit to Thailand, Singapore and Taiwan is that most Asian economies are well on their way back--swallowing a lot of pride, perhaps, but definitely on the mend.

Asian stock markets certainly seem to believe that: They rocketed in the first half of 1999, after plunging last fall to their lowest levels in as much as 10 years.

The South Korean market, for example, soared 57% in local currency terms in the first half, while Singapore’s market leaped 56%, Thailand’s gained 47% and Hong Kong’s jumped 35%.

By contrast, the U.S. blue-chip Standard & Poor’s 500 index rose 11.7% in the half.

U.S. mutual fund investors who bet on Asia’s recovery were well-rewarded: The average Pacific region fund gained 34.1% in the first half, after a dismal five-year stretch of weak or negative returns.

But is this rally sustainable? Sit, co-manager of the Sit International Growth Fund in New York, believes that it is, though perhaps not at the same blistering pace.

It has been tough to beat Wall Street’s returns in recent years, but finally “it’s time for a shift in leadership to overseas markets,” argues Henry A. (Hank) Frantzen, global chief investment officer for Federated Investors, a Pittsburgh-based mutual fund group.

Frantzen is bullish on both Asia and Europe. He sites several “big themes,” including the ascendancy of U.S.-style capitalism over communist and socialist models and the continuing lowering of trade barriers around the globe.

The case for Asia, specifically, goes like this: The government deficits and corporate overspending that helped spark the currency-devaluation wave that began in mid-1997 have in large part reversed. Surviving companies have slashed costs and capital spending.

Now even a modest uptick in demand for goods and services--already being felt in many Asian nations--will boost prospects for companies. As optimism feeds on itself, pent-up consumer spending will spur growth and attract more foreign investors back to the region.

“We think consumers will be a major force behind the economic recovery, taking the place of capital expenditure,” said Christopher Lively, manager of the Pioneer Indo-Asia Fund in Boston.

But after the spectacular first-half gains, should investors wait for a pullback to get in?

Sit argues that even with the run-up, Asian stock valuations are attractive. South Korea’s market is priced at about 14 times next year’s estimated earnings--less than half the price-to-earnings ratio of the S&P; 500, he said.

Hong Kong’s estimated 2000 P/E is about 14 as well, while Thailand and Taiwan have 2000 market P/Es of about 20--still cheap if their economies keep rolling, Sit argues.

He expects Asian stocks to return an average of 15% a year for the next three years. The U.S. market, he figures, will settle back to more normal gains of 8% to 10%.

What are the risks to Asia’s new bull market? The biggest wild card remains the biggest economy: Japan, where stocks surged 27% in the first half and have added to their gains in recent days.

Merrill Lynch global economist Michael Hartnett is forecasting annualized growth of 1% in gross domestic product for Japan during the next 18 months--not brisk but better than an earlier forecast of no growth or a further contraction for the long-suffering economy.

Japanese manufacturers have been so afraid of overproduction that inventory levels are the lowest in decades for autos and steel, Hartnett said.

If export demand picks up, as he expects it to, production will rise quickly, and profits with it. An uptick in corporate profits would ease fears about layoffs and improve consumer confidence and spending, for a classic virtuous growth cycle, Hartnett said.

China also poses a risk. Its economy is growing, but only because of what Sit calls “an extreme dose of Keynesian economics” in the form of a huge government infrastructure-building project, including highway, water, power and telecommunications systems.

With exports flagging, China could at some point choose to devalue its currency to make its goods less expensive for foreign buyers. (China insists it won’t devalue.)

Fear of the year 2000 computer bug could also hamper Asian markets later this year. And there’s always the risk of the unexpected shock--war, revolution, etc.

Still, after two years of extraordinary economic pain, many experts say it’s a smarter bet that Asia’s recovery will continue than that it will collapse.

Indeed, Morgan Stanley Dean Witter economists calculate that Asia’s vulnerability to another financial crisis is now near a 20-year low, given the declines in global interest rates, the countries’ depreciated currencies and the restructurings underway in much of the Asian corporate sector.

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Times staff writer Thomas S. Mulligan can be reached by e-mail at thomas.mulligan@latimes.com