Mexico's misfortune may be Hong Kong's opportunity if the emerging markets can recover from the general panic that seized them late last year. Unlike Latin American economies which have relatively high levels of debt and recent histories of inflation, the emerging economies of East and South Asia have followed relatively tight monetary policies, with low debt and low inflation.
They are also relatively strong in manufacturing industry and exports, and well placed to take advantage of sustained growth in world trade. Unlike Latin America, which is heavily dependent on North American markets, East Asia in particular has an each-way bet, benefiting from Japanese investment and US export markets. And share prices are cheaper than they were after falling 20-40 per cent in the past 12 months.
Historically, Hong Kong has been the dominant market, but the other emerging markets in Asia offer investors an increasing choice. The Hong Kong market fell 15 per cent in the six weeks after the Mexican crisis broke, triggering a wave of liquidation by mainly US-based fund managers pulling money back home.
Inevitably the sell-off spread to other markets, regardless of the fundamentals. But the Hang Seng index has since rebounded and stands only 5 per cent below the level at the start of the Mexican panic.
The shake-out however came on top of a steady fall in share prices from the peak levels reached in early 1994. Once again Hong Kong led the way, reflecting the political uncertainties over its future under Chinese rule, as well as the current adminstration's policy of linking the Hong Kong dollar to the US dollar, a policy that inevitably makes Hong Kong hyper- sensitive to the successive rises US interest rates over the past year.
The importance of property companies and banks, both highly sensitive to interest rates, in the Hang Seng index, further increases the impact of US interest rates. From the all-time peak last February Hong Kong shares fell more than 40 per cent and are still one third lower than a year ago.
Inevitably, the Hong Kong stock market is highly volatile. But Hong Kong is a resilient economy. Michael Thompson-Lawson, chief executive of Crosby, the specialist agency broker and fund manager, points out that Hong Kong has never experienced a domestically-generated recession, and as long as trade accounts for 200 per cent of gross domestic product, such a thing is next to impossible.
Crosby also takes a more optimistic view about US interest rates being close to the peak, which implies a more optimistic outlook for Hong Kong, too. The threat of inflation and political instability in mainland China has also receded perceptibly in recent weeks.
Taiwan and South Korea have been much less volatile than Hong Kong, although they tend to be less favoured by UK investors and fund managers. Malaysia and Singapore are more easily traded, have combined market capitalisations greater than Hong Kong, and have suffered less in the past12 months. But the Singapore economy is showing signs of strain after two years of rapid growth and Malaysia is also showing signs of over-heating. Neither is on Crosby's buy list.
Investors have other options. Thailand is likely to benefit from a peaking in US interest rates, and the outlook for company earnings is good. Shares in Indonesia look cheap in relation to rising earnings Small investors are well advised to look for a balance of risks among unit trusts and investment trusts.