I do not normally have a good memory, but I remember exactly where I was and what I was doing 10 years ago tomorrow.
I spent much of the day standing with my colleagues in the Kamiyacho office of Swiss Bank, staring at the wall of screens behind our trading desk. They showed almost every single listed stock in Japan falling, and the same was happening in every other market across Asia.
Falling stocks in Japan were just a short-term side effect of the Asian crisis that was to cause an appalling multi-year bear market in southeast Asian equities.
The crisis was kicked off by a couple of speculative attacks on the Thai baht but once markets started to fall the world’s investors had a real look at the fundamentals of the region (huge current-account deficits, overvalued fixed currencies, indebted companies, horrible corporate governance and so on) and then at their risk-tolerance levels.
They fast decided the latter weren’t quite so high as they had been a few weeks earlier, so they started selling – and kept selling.
Over the following two years shares in South Korea fell 60%, those in Thailand fell 49% and across the region as a whole by an average of 47%. At the same time the currencies of all southeast Asian countries went into freefall, their interest rates soared to an average of more than 15% and growth rates collapsed.
Today, it’s hard to believe the crisis ever happened. Southeast Asian stocks have, according to Halifax, risen 124% in the past five years and are a good 70% above precrisis levels. Economic growth has also returned and still looks on an upward trend (about 5.5%) while inflation and interest rates are low (an average of 4.4% compared with a mid-crisis level of over 15%).
Better still, in the past five years all the southeast Asian countries have been running current-account surpluses – and healthy ones at that. This has allowed them to build up huge foreign-currency reserves to the extent that nobody imagines they could ever see the kind of crisis that so shocked my colleagues and I all those years ago.
Indeed, so good are things in the region these days that there is a general perception that the economic world has come full circle.
In 1997, global recession was avoided because America kept growing (some even blame its growth for the crisis as it pushed up US interest rates and hence pulled hot money out of Asia).
Today, it is said that if the US economy keeps weakening, growth in the East (including India and China) will keep global economic growth rising and prevent any crisis. The situation, as economists and analysts like to say, is “benign”.
They may be right. If the US slowdown turns out to be mild (economic growth is at its lowest for four years) there is every chance the baton of global growth will pass to Asia. The perception of risk may have come full circle too: 10 years ago Asian markets were an accident waiting to happen. Today the same could be said about western markets.
Look at the bond markets. These are supposed to be boring, but over the past few weeks they have been anything but. The yield on UK government bonds, for example, rose from about 4.6% in March to nearly 5.6% in June. The movement in the yield on the US 10-year Treasury bond has been even more dramatic recently – in the first three weeks of June it has gone from 4.7% to 5.3%. It seems that the bond bull market of the past 20 years is over.
This is bad news for all asset classes. A rise in the yield on investments that are supposed to be risk-free (government bonds) implies higher yields and lower prices on all other assets, be they overpriced FTSE 250 stocks or corporate bonds issued to finance big mergers and acquisitions.
It is also impossible to ignore the US housing crisis. I am constantly being told that the worst is over but it quite clearly isn’t. House prices have been falling fast in many areas and, depending who you listen to, between 7% and 12% of sub-prime mortgages are in default. It could, said Christopher Wood of CLSA, be the pin that finally pricks the global credit bubble.
The question then is what effect a market crisis in the West would have on the markets of the East. The Asian crisis turned out to cause little more than a blip in the long upward march of the US market. Would a full-blown credit crisis originating in the West be just a blip for Asia?
Woods thinks so. It would, he said, cause a decline of “at least one-third” in Asian equities, excluding Japan, initially, but given that the region is “clearly in the middle of a long-term bull market” it would also create a “massive buying opportunity”.
Right now several UK-listed Asia investment trusts – Schro-der Asia Pacific, Edinburgh Dragon, Henderson TR Pacific– are trading at hefty discounts to their net asset value. Those who think global conditions are “benign” might consider buying these trusts now, but I have a feeling that those of us who wait for a few months for things to really come full circle might get them at an even bigger discount.
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First published in The Sunday Times 1/7/07
The Asian crisis: 10 years on
For more on the 1997 Asian crisis, read Learning the lessons of the Asian financial crisis