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.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Life and Style
Customers can get their caffeine fix on the move
food + drink
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
PROMOTED VIDEO
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Loaded weapon: drugs have surprise side effects for Scarlett Johansson in Luc Besson’s ‘Lucy’
filmReview: Lucy, Luc Besson's complex thriller
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
News
Jermain Defoe got loads of custard
i100
News
peoplePamela Anderson rejects ice bucket challenge because of ALS experiments on animals
Arts and Entertainment
tvExecutive says content is not 'without any purpose'
News
A cleaner prepares the red carpet for the opening night during the 59th International Cannes Film Festival May 17, 2006 in Cannes, France.
newsPowerful vacuum cleaners to be banned under EU regulations
News
newsChester Zoo have revealed their newest members
Sport
sportLeague Managers' Association had described Malky Mackay texts as 'friendly banter'
News
The video, titled 'A Message to America', was released a day after Islamic State, an al Qaeda offshoot that has overrun large parts of Iraq, threatened to attack Americans 'in any place'. U.S. officials said they were working to determine the video's authenticity
i100
Life and Style
fashion
Arts and Entertainment
tvSpielberg involved in bringing his 2002 film to the small screen
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

    Business Analyst

    £250 - £350 per day: Orgtel: Business Analyst, Bristol, Banking, Business Obje...

    Trainee Recruitment Consultant - IT

    £20000 - £25000 per annum + OTE £40,000: SThree: Computer Futures has been est...

    Generalist HR Administrator, Tunbridge Wells, Kent - £28,000.

    £25000 - £28000 per annum: Ashdown Group: Generalist HR Administrator - Tunbri...

    Application Support - Enterprise Java, SQL, Oracle, SQL Server

    £45000 - £55000 per annum: Harrington Starr: A well-established financial soft...

    Day In a Page

    Air strikes? Talk of God? Obama is following the jihadists’ script

    Air strikes? Talk of God? Obama is following the jihadists’ script

    The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
    Ebola outbreak: Billy Graham’s son declares righteous war on the virus

    Billy Graham’s son declares righteous war on Ebola

    A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
    Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

    Not even Jeremy Clarkson is bigger than the BBC, says TV boss

    Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
    Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

    Nick Clegg the movie

    Channel 4 to air Coalition drama showing Lib Dem leader's rise
    Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

    Philip Larkin: What will survive of him?

    Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

    Waxing lyrical

    Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
    Texas forensic astronomer finally pinpoints the exact birth of impressionism

    Revealed (to the minute)

    The precise time when impressionism was born
    From slow-roasted to sugar-cured: how to make the most of the British tomato season

    Make the most of British tomatoes

    The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
    10 best men's skincare products

    Face it: 10 best men's skincare products

    Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
    Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

    Mackay, Moody and another grim day for English football

    The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
    La Liga analysis: Will Barcelona's hopes go out of the window?

    Will Barcelona's hopes go out of the window?

    Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape