Japan falls close to recession and rushes forward with a massive public bailout of its debt-besotted banks. The entire South Korean economy seems on the verge of receivership. China's growth is slowing down, and it's choking on excess inventories of bicycles, washing machines, and televisions. Speculators are shorting the Hong Kong dollar and roiling the Hang Seng Index. In Indonesia, Malaysia, and Thailand, currency and equity markets continue to tumble by the day. And nobody knows when the parachutes will open.
You get the picture. If you don't, just wait until your yearend Asian mutual-fund statement arrives. In dollar terms, the Hang Seng and Tokyo's Nikkei stock average have each lost roughly a quarter of their value since January. Bourses in Bangkok, Kuala Lumpur, and Seoul have given up some 70%. So is it time for the savvy global investor to rush back in and pick up the pieces at stunning discounts?
GOOD WITH THE BAD. Only if you have a cast-iron stomach, a very discerning eye, and a long-term perspective. Along with the dross, Asia's crisis has swept up some of the world's best-managed companies. For example, shares of HSBC Holdings PLC, owner of the huge Hongkong & Shanghai Bank and one of the world's best-capitalized lenders, have slumped a third since summer. So no one would fault you if you steered clear of Asia until the ruckus dies down.
Which, by all signs, it won't for a while yet. This year, Southeast Asian economic growth should slow four percentage points from its pre-bust 1996 level of 7.2%. Japan will be lucky to see 1% growth in 1998 after treading water in '97. The carnage could even be far worse if the region's leaders get cold feet on reforms demanded by the International Monetary Fund and other emergency lenders.
In Seoul, opposition presidential candidate Kim Dae Jung first flatly vowed to renegotiate South Korea's $60 billion deal with the IMF if he prevails in a Dec. 18 general election. But after the retiring President Kim Young Sam and other major candidates said on Dec. 13 that they would make their best efforts to observe the deal, Kim Dae Jung then said he would seek only "supplementary" negotiations to minimize layoffs. However, investors are still edgy over the future of the bailout. And with President Suharto's health questionable, it's unclear how IMF austerity plans will fare in Indonesia, either. Ditto for Thailand, where Prime Minister Chuan Leekpai's government is just beginning the heavy lifting that's needed.
Then there's a really nasty scenario. Will China emerge as Asia's next casualty? Should Beijing botch its overhaul of its money-losing state enterprises and a banking sector saddled with $200 billion in dud loans, it might be tempted to devalue the renminbi in an attempt to export its way out of the jam. That would undercut the credibility of the Hong Kong dollar, which is linked to the U.S. greenback, annihilate the Hang Seng, and prompt Japan and the Tiger economies into even greater devaluations than the sharp ones they have already seen.
Such a wave of beggar-thy-neighbor devaluations could push the region into a deflationary vortex that would crush corporate profit margins from Tokyo to Jakarta. With luck, that won't come to pass. But fears of corporate wipeouts are prompting those who still have an appetite for stocks to stick with proven multinationals, companies with scads of cash, or unique pricing or technology advantages.
Nowhere is this more true than in Japan. Prime Minister Ryutaro Hashimoto's government has dropped its fixation on cutting Japan's massive budget deficit down to size. Instead, Hashimoto is moving to reflate the economy and fragile banking sector with tax cuts and a massive injection of public funds. However, few see the economy rebounding until 1999, given that some 40% of Japanese exports go to Asia's now-struggling regional economies.
MOVIE MAGIC. This is scarcely the script for a market rally. That's why Tom Fujita, director of Merrill Lynch International Capital Management, is staying focused on the "best-placed global companies in each sector--those with strong balance sheets." At the top of his list is Sony Corp. It trades at a comparatively modest price-earnings ratio of 24, yet it's enjoying a big turnaround with Sony Pictures, thanks to such hits as Men in Black and Air Force One. HSBC analyst James Capel expects Sony's earnings to jump 47% for the fiscal year that will end on Mar. 30, to $1.5 billion. Asian concerns and slowing PlayStation video-game sales will probably depress the company's profits in the coming fiscal year. But by fiscal 1999, it could come roaring back--to as much as $1.7 billion.
Investors are also leaning toward financial giants that can withstand Japan's banking shock. A series of failures have driven consumers to the more secure Bank of Tokyo-Mitsubishi Ltd., whose deposit base has swelled 6% since November, to $119 billion. Nomura Securities Co., Japan's largest stockbroker, is likewise expected to benefit from the failure of rival Yamaichi Securities Co.
In Hong Kong, a sudden currency devaluation by the mainland isn't the only worry. The other is that the Federal Reserve decides to hike U.S. interest rates in the face of continued strong growth. That would force the Hong Kong Monetary Authority to do the same. A local rate hike would put pressure on the property market and drag the entire Hang Seng down. But Jean de Bolle, executive director of Asian investment research for Goldman Sachs (Asia), believes that major companies with sizable interests on the mainland--including Hutchinson Whampoa, CITIC Pacific, and China Southern Airlines--should continue to enjoy strong earnings in 1998.
Another regional safe haven is Singapore Airlines, whose p-e is a modest 8.7. Hugh Young, managing director of Aberdeen Asset Management, observes that it has strong management and a rock-solid balance sheet that, unlike some other Asian carriers, means it shouldn't have to sell planes to raise cash. Yet it is trading at book value. Contrast that with just about any stock in Seoul these days. With some of South Korea's biggest conglomerates, or chaebol, failing under massive debts, there seems to be little way to avoid getting caught in the crossfire.
With Kim Young Sam's government having just eased restrictions on foreign takeovers, however, "mergers and acquisitions will be a new theme," believes Park Kyung Min, chief investment officer at Asset Korea Capital. One likely target is Kookmin Bank, formerly known as Citizens National Bank. Its bad loans account for only 3.4% of its total lending--not bad by Seoul standards.
The collapse of India's United Front coalition government in November has also set investors on edge. Elections are set for early 1998, but further delays in deregulating the economy would put new pressure on the rupee and stocks. Another unwieldy government would hit stocks further. Staying on the defense, local pros are leaning toward consumer stocks such as Indian Tobacco Co. and software specialists such as Infosys, which develops programs for financial-services firms.
Not every Pacific Rim economy has tanked. Taiwanese companies have maintained strong balance sheets, and many boast the kind of technological edge that should carry them through the downturn. David Yu, vice-president of International Investment Trust, a Taipei fund manager, thinks Taiwan's strength in sub-$1,000 personal computers remains a big plus despite slower global demand. He likes notebook-computer marker Compal Electronics Co. True, its stock has shot up 100% this year. But since its earnings are expected to rise 50% next year, Yu thinks it still looks like a good buy. Oriental Semiconductor Engineering, a chip-packaging company, should also prosper as Taiwanese semiconductor makers move into higher-end products.
Good values, perhaps. But do you have the guts--and the patience--to jump in? Asia's crisis isn't likely to end anytime soon. As a result, brave souls who are determined to take the plunge should be prepared for the roller-coaster ride of their lives.