The croynism at the heart of Asia's crisis

The Jonathan Davis column

Despite the steady stream of news reports chronicling the latest events in Japan, Korea and Indonesia, I suspect few people in this country have any clear sense of exactly what is happening, beyond the feeling that crisis is probably an appropriate term for what is taking place.

My crystal ball is certainly no better than anyone else's, but what is clear is that there are two distinct sides to what is happening. One is the developing economic and financial crisis in a number of Asian countries, all of whom trade with each other and therefore are vulnerable to contagion from each other's problems.

At the root of the problem is the apparent indication that the so-called Asian miracle is running out of steam. The rapid growth of the past 20 years is slowing down, with many of the tiger economies which led the way now showing signs of losing their competitive edge. The Japanese economy has been stalled for several years now, with its Government unable to find effective measures to restimulate growth, but what is new is that the second tier of Asian countries, such as Korea and Indonesia, are also now feeling the heat, with their currencies weakening and their industries afflicted by over capacity and rapidly disappearing demand.

This in turn has been compounded by a serious banking crisis of the kind that traditionally follows periods of rapid growth, with many banks and banking institutions which lent freely in the years of fat, finding themselves over exposed. This financial crisis has exposed many of the fault lines in the way that these countries have managed their financial affairs - too much cronyism, too many complex interparty loans, a collapse in collateral values, and so on (not that this is a problem from which western banks have been immune in the past!).

After years of effective state control, the Japanese have finally allowed a leading bank and a large stockbroking firm to go bust, but there are many more financial institutions which are technically insolvent. With no inflation to erode the value of their bad debts, it seems clear that it is going to take quite a long time for the bad debts and financial problems in many of the leading Asian cou ntries to be worked out of the system. The second aspect of the crisis is the reaction of the financial markets to this unfolding story of newly apparent economic problems. As always tends to happen in such circumstances, sentiment towards Asia as a focus of investment is rapidly turningsour . The wild exuberance which led many stockbroking firms to carry on peddling the merits of the Tokyo stock market when it was absurdly overvalued in the late 1980s is being replaced by unmistakable signs of anxiety in many markets. Typically, Hong Kong, the most volatile of all the world's leading stock markets, is taking a lead again (was it only a year ago that the market was booming?), but institutional investors in Europe and the United States, who were merrily still buying int o both the Asian and emerging markets story a year ago, have also started to take fright at the way the crisis is developing, retreating to "safer" havens. The stock market statistics tell their own story. Of the 15 largest developed country markets last year, only one went down last year - and that was Japan (which fell 21 per cent and is currently stuck in a trading range around the 14,000-15,000 level). All the other 14 markets rose. Of the 11 leading stock markets in Asia, only three - China, India and Taiwan - rose in local currency terms. Most of the others were down, by anything between 20 per cent and 60 per cent over the year. Not surprisingly, vi rtually all UK unit and investment trusts invested in Asia, either as country or regional funds, have taken a pasting over the past year. The latest performance statistics paint a sorry picture. In the year to mid-December, for example, the average Japan-only unit trust was down by 28 per cent over one year, 39 per cent over three years and 3 per cent over seven years. The average FarEast fund (excluding Japan) is still comfortably ahead over seven years (plus 60 per cent), but down 31 per cent over both one and three years. Because of widening discounts, equivalent investment trusts have turned in an even worse performance. As theseare average results, some of the individual fund outcomes are inevitably worse still - pity the poor investor who opted to buy a Thailand unit trust three years ago. It has lost nearly 80 per cent of its value over the period. But what now? There is no question that the crisis, in both economics and sentiment, is a real one. Conventional wisdom now is: avoid the region like the plague. It is too risky. But, of course, for many Asian countries the advice is far too late. The ri sk has been there from the beginning in many Asian countries: it is the flip side of the above average returns which the region has generated for most of the 1990s. The case for buying individual country funds outside Europe or the United States hasalwa ys seemed weak to me, given the specific risks involved in many individual emerging markets. Regional funds are not much better, in my view, unless you really think you are capable of distinguishing which region is going to do better than another. As I said last month, however, the case for putting a modest amount of money into a diversified emerging markets investment trust at a discount of 20 per cent is another matter. Provided you are a genuinely long term investor, the value looks attractive to me. It is, after all, when things are at their gloomiest that the best bargains become available. It will undoubtedly spill over and affect our own stock markets in due course, though how badly is impossible to say. The other lesson to remember is that just because markets keep going up, it does not mean they cannot be overvalued at the same time. Ju st look back to what they were saying about how attractive Japanese shares still looked in 1988/89 on a p/e ratio of 60! Even in markets, where hopes are free and plentiful, reality has a nasty habit of catching up in the end.

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Programme Director - Conduct Risk - London

    £850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

    Business Analyst (Agile, SDLC, software)

    £45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

    Finance Manager - Bank - Leeds - £300/day

    £250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

    Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

    £100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

    Day In a Page

    Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

    Noel Fielding's 'Luxury Comedy'

    A land of the outright bizarre
    What are the worst 'Word Crimes'?

    What are the worst 'Word Crimes'?

    ‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
    Can Secret Cinema sell 80,000 'Back to the Future' tickets?

    The worst kept secret in cinema

    A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
    Facebook: The new hatched, matched and dispatched

    The new hatched, matched and dispatched

    Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
    Why do we have blood types?

    Are you my type?

    All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
    Honesty box hotels: You decide how much you pay

    Honesty box hotels

    Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
    Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

    Michael Jamieson: Why weight of pressure rests easy on his shoulders

    The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn