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Now That the Tigers Have Been Tamed, Is It Time to Embrace Them?

September 07, 1997|TOM PETRUNO

When emotion takes over, logic beats a hasty retreat. So it is with hysterias fueled by the untimely death of princesses . . . and, more appropriate for this page, with hysterias in financial markets.

Until late last week, most Southeast Asian stock markets had been in the grip of panic selling since early July, as their currencies plunged in value and 15 years' worth of optimism about the "Asian economic miracle" seemed to evaporate.

On Friday, finally, those beaten-down markets rallied sharply, spurred in part by the Malaysian government's decision to give up its absurd efforts to simultaneously blame foreign investors for the carnage while also restricting their ability to trade in Malaysian shares.

After plummeting 21% between Aug. 20 and last Thursday--the equivalent of the Dow Jones industrials' sinking from Friday's close of 7,822.41 to about 6,180, in less than two weeks--the main Malaysian stock index rocketed 90.47 points, or 12.4%, on Friday to 821.59.

Likewise, Indonesia's main stock index zoomed 11.3% on Friday after diving 33% between Aug. 4 and last Tuesday; Thailand's key index rose 3.5% on Friday, after losing 28% between July 29 and last Monday.

Despite Friday's gains, these markets and others in the region remain by far the world's most distressed collection of stocks in 1997. Year-to-date, Malaysian stocks are down 34% in local currency terms and down 43% in dollar terms (because of the currency devaluation); Philippine stocks are down 46% in dollars.

Disastrous losses? Of course, if you were unfortunate enough to be in these markets. But many investors today ought naturally to have another thought: Isn't the best time to buy almost any investment precisely when highly emotional, panic selling is at its worst?

In other words, if you believe it's smartest to "buy low, sell high"--and why wouldn't you?--shouldn't you be putting a little money into the most depressed markets you can find today?

Over the last decade, there have been plenty of cases where the payoff from buying into sudden and deep market declines was terrific. Think about the U.S. stock market crash on Oct. 19, 1987; the Hong Kong stock market's dive after the 1989 Tienanmen massacre; the U.S. junk bond market's collapse in 1990-91; and the Mexican stock market's plunge in late 1994 and early 1995.

In each situation, securities were being surrendered at prices that the sellers regretted not all that long afterward.


Still, that hasn't been the universal case with collapsing markets in the 1990s. The greatest exception is well-known indeed: Japan's stock market crash in 1990 and 1991 left the blue-chip Nikkei-225 index at 23,000 by the end of 1991, down 41% from its late-1990 peak. Today, the Nikkei is at 18,650--19% below what might have appeared a bargain to many at the end of 1991.

Japan's seven-year market depression raises the obvious question: Will Southeast Asian markets follow that pattern, or the Mexican model of a relatively fast recovery?

Like Mexico, the underlying problems of Southeast Asian economies, after years of rapid growth and heavy investment, were revealed first by the collapse of their currencies--a reaction to rising trade deficits, slowing export growth, and, especially in the case of Thailand, a debt burden that now is unserviceable.

But also like Mexico, Southeast Asia has young economies with young populations and still-low wage rates--demographics that imply there is substantial growth ahead for them. By contrast, Japan's burdens include an aging population and a high cost structure, problems that have clearly worked against the country as it has struggled to recover from its economic crash.

What worries some investors, however, are the similarities they see between Southeast Asia and Japan in terms of government policy. Like Japan, many Southeast Asian governments have for years failed to fully embrace the idea of economic deregulation and free capital flows, a stance best reflected in Japan's unwillingness to allow market forces to cleanse its banking system of the scourge of bad loans left over from the 1980s bubble economy.

Mexico was forced by the U.S.-led bailout of 1995 to further open its economy and its markets, which in turn fortified investor confidence in the country and set the stage for the economy's recovery.

In the current Southeast Asian crisis, the reaction of Malaysia's government has been particularly aggravating to investors. First, the government blamed the currency's decline on foreign speculators. Then it tried to restrict trading in its stocks--which only made a bad situation worse.

By Friday, however, the government was in retreat. Wisely, it lifted the trading restrictions. And in another sign that it understands what the market is telling Malaysia, it said it would postpone several large infrastructure projects that would have further indebted the country.

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