Hamish McRae: Hope emerging in the East

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The Independent Online

Since it has been yet another of those weeks for shares, let's start with this question: which of the main equity markets have done best this year? The answer is the so-called "emerging" markets of East Asia.

Since it has been yet another of those weeks for shares, let's start with this question: which of the main equity markets have done best this year? The answer is the so-called "emerging" markets of East Asia.

Look around the world and the general pattern has been one of economic recovery but market meltdown. That is particularly true of the US, UK and European markets, though the continental recovery has been much weaker than the US and UK ones. In Japan there has been a recovery of sorts (but not a very secure one) and, surprise, surprise, a modest rebound in share prices.

But the star performers, both in terms of economic growth and market performance, have been the newly developed countries of East Asia. Why so? And might these countries become a lead indicator for the rest of the world?

The background is that through the first half of the 1990s, emerging East Asia was the main driving force in the world economy. China was growing (and still is if you believe the figures) at around 8 per cent a year, as were Korea, Malaysia, Thailand, Singapore and Hong Kong – the last, at that stage, still independent of China. It was calculated that during the first half of the 1990s, the region was contributing two-thirds of all world economic growth.

Then came the crash of 1997. It was both an economic and a financial crash and the market aspect of the East Asian collapse is shown in the left-hand graph. But look at what has happened since. There was a modest recovery through 1998 and 1999, then during 2000 East Asia got caught up in the global bear market. Note, though, that the downturn started in early 2000 – not March/April, the peak of the US and European markets – and the bottom was reached last September, since when East Asia has recovered rather well.

So, in a sense, the region was in 2000 a lead indicator of trouble to come, which raises the question of whether it is a lead indicator of better times now.

I have just been looking at JP Morgan's growth forecasts for the Asian region for this year. China is 7.0 per cent; India 6.0 per cent. The world's two most populous countries are doing pretty well. Korea is expected to come in at 5.3 per cent, Malaysia at 4.0 per cent, Taiwan at 3.5 per cent.

Don't trust forecasts and want to see some real numbers? Well, exports seem to be doing pretty well and there are at least three reasons why what happens in East Asia is a sensitive indicator of the swings in the world economy.

For a start, these are export-driven economies, with exports to the US particularly important as a determinant of total demand. Second, while the balance of high-tech/low-tech varies from country to country, taken as a whole the region relies on various forms of electronics. If there were a high-tech recovery taking place, you would expect it to show there first. And third, global trade in electronic components and equipment is particularly volatile. As a recovery takes place, you would expect volatile industries to flip around fastest.

You can see this flip in exports by looking at three data snapshots that just happen to have come out in the past few days. One is of Taiwan, where orders are nearly back up to their peak and actual exports are increasing nicely. There is every chance that exports will soon be back up to their peak too.

Next come Korean exports – in this case, just actual exports. The recovery there seems to be running at pretty much the same pace as in Taiwan.

And finally there is India, this time showing rates of export growth rather than actual levels. Indian merchandise exports are more broadly based and generally lower-tech than those of Taiwan and Korea: lots of software, of course, but those count as service exports. The graph for India also shows the global purchasing managers' index, a lead indicator for world trade. The interesting thing here is that if the relationship with the global PMI is maintained, Indian exports too could soon be growing 20 per cent year-on-year, an impressive performance.

For India, the downturn is clearly over.

All this is pretty encouraging. One could take less encouraging examples, of course. Singapore has been struggling, largely because it is at the top end of East Asian manufacturing and has been losing business to lower-cost producers. If a US company shuts its domestic production and shifts it to East Asia, as has been happening a great deal during this downturn, the firm will go to a place where costs are much lower than in the US, not just a little lower, as in Singapore. But the worst may now be over there.

Hong Kong too has been having a hard time, partly because it is being squeezed by growth in Shanghai, partly because of political uncertainties, but also partly because of its high costs.

In addition, the lacklustre performance of Japan remains a drag on the region, a drag not fully compensated for by the apparently still-rapid growth in China.

So it would be wrong to paint a portrait of regional boom. The "third time zone" (I don't know why we call it the third one, when chronologically it is the first) has not yet resumed its role as the main engine of growth in the world economy. It is dependent on exports and hence on US demand – too dependent really.

However, the fact remains that we now have two of the three time zones – the American and the South Asian/East Asian – producing decent growth. Only the European one (ex-UK) is still not generating any rise in demand.

It is hard, given all this, and in particular seeing the way in which the Far East share markets are reflecting this relative success, not to feel just a little more cheerful about the prospects for equity markets elsewhere. Well, just a little.

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