The tiger burns bright once more

Devastated in a tidal wave of financial destruction in 1997, Asia is fighting back and opening up to lucrative investment

Only a few years ago the darling of the global equity market had to be the Far East. Economic growth in the region was anything between 5 per cent and 10 per cent. A young population determined to improve itself by investing and saving, strong government finances without the drag of a welfare state, all seemed to provide a fairy-story tale of riches for investors. The financial crisis triggered by the devaluation of the Thai baht on 2 July 1997 meant this story ended unhappily. Devaluation spread like a tidal wave virtually wiping out stock markets across the region, even the mighty centre of Hong Kong was swamped. The fall in stock markets was worse than the Wall Street crash of 1929 and many commentators felt it would take years to recover. But the tiger has been reborn and is once again roaring.

Only a few years ago the darling of the global equity market had to be the Far East. Economic growth in the region was anything between 5 per cent and 10 per cent. A young population determined to improve itself by investing and saving, strong government finances without the drag of a welfare state, all seemed to provide a fairy-story tale of riches for investors. The financial crisis triggered by the devaluation of the Thai baht on 2 July 1997 meant this story ended unhappily. Devaluation spread like a tidal wave virtually wiping out stock markets across the region, even the mighty centre of Hong Kong was swamped. The fall in stock markets was worse than the Wall Street crash of 1929 and many commentators felt it would take years to recover. But the tiger has been reborn and is once again roaring.

The origins of the crisis lay in over-investment and over-borrowings in American dollars. Companies expanded rapidly, money was easy and corruption probably widespread. Much of this has now been blown away. One of the region's great advantages - its young population - meant that change was not culturally abhorrent. The region has therefore started to open its markets to foreigners; this in turn has brought new ideas to the locals. In particular, corporate accounting has improved along with a greater emphasis on shareholder value - something western economies take for granted. Corporate profits have risen dramatically in some cases and both overseas and local investors have returned to the stock markets. Many markets rose by over 50 per cent in 1999 and some top performing unit and investment trusts have doubled in value.

So what is the outlook for 2000? Interest rates and inflation are low while real economic growth should be around 7 per cent. A strong yen against the dollar helped Asian exports. China's entry into the World Trade Organisation will mark a real opening up of the largest country in the world. This should boost free trade and accelerate reform. In addition factors that have been propelling western markets higher - restructuring, a focus on shareholder value and new technologies, particularly the internet - are now beginning to hit Asia.

The "easy part" of the Asian recovery has happened but providing there are no external shocks Asian markets should continue to perform well. There are still potential problems, recovery in markets may slow much needed reform in the banking and corporate systems. Rising American interest rates are also not helpful and political unrest is often not far away.

In my view the key countries to look at in the region are China/Hong Kong, Taiwan, South Korea, Singapore and the outsider Malaysia. China has had real problems with deflation but excess capacity has fallen while export growth has picked up strongly. The economy is set to grow by around 7 per cent but the key factor is entry into the World Trade Organisation. This will spur reform and also help reduce China's risk premium. It will bring problems because imports will increase as the country is opened up and rising unemployment could cause social unrest. However, China, especially on a monthly savings basis, could prove very profitable. My suggestion would be an offshore fund run by Aberdeen called China Opportunities.

Hong Kong will be a key beneficiary of China's entry into the World Trade Organisation as it is still seen as a gateway into the country. A natural base for multinationals. This can be seen by the location of the third Disneyland in Hong Kong scheduled to open around 2003/04.

South Korea has seen the strongest recovery in Asia despite huge debts of some of the largest conglomerates. The country should see sustainable growth of around 5 per cent per annum. It now ranks among the top 10 online user nations.

Taiwan has elections in March which may unsettle the country but it has a very strong tech stock industry and has been a major beneficiary of the outsourcing trend in PCs and telecommunications. China's entry into the World Trade Organisation will also result in better market access for Taiwanese exporters.

Singapore is probably the most mature of the markets and responded in the most positive way to the original crisis. The government aims to transform Singapore into a service centre with a focus on technology. Malaysia adopted the opposite policy to its neighbour Singapore and reintroduced capital controls in the crisis. This much-criticised and unorthodox approach has worked! Low interest rates, a cheap currency and booming exports have led to much inward investment. A return to the MSCI Index in May should boost market returns. This is my market of the year.

So how do you play the region's return to favour? Both unit trusts and investment trusts look attractive and there are plenty of good quality trusts. In unit trusts, I would look at Fidelity South East Asia (also available as an investment trust under Fidelity Asian Values on a discount of around 10 per cent). This follows a conservative strategy focusing more on blue chips. Managed locally by K C Lee this makes an excellent core holding. Two other unit trusts that I rate extremely highly but are virtually unknown to the public are Solus Eastern Enterprise and Lloyd George Eastern Opportunities. Adaline Ko used to run the former fund until October last year. It has a tremendous track record.

However, new managers Lawrence Yip and Christopher Wong were brought in. Both have an envious record in the region, so I am prepared to back the change. But Adaline under Lloyd George launched a new fund in January. She has a more aggressive approach than Fidelity but I expect to see this fund near or at the top of the league tables over the next year or so.

Quality investment trusts include Schroder Asia Pacific, Fidelity Asian Values and Fleming Asia. All three funds are sporting double digit discounts and if the region and the trusts' assets continue to improve these should narrow dramatically.

Remember that there are different ways to play this theme. In buying into South East Asia you are in effect getting into technology on the cheap. These areas are behind the West but catching up fast - the region remains a strong buy.

Mark Dampier is head of research at Hargreaves Lansdown