Foreign fuel needed to find road to recovery
A fitting epitaph for many an emerging market investor might read: knew the price of everything but the value of nothing. To use the Biblical metaphor, if the wage sin pays is death, then now-penitent foreign banks are paying heavily for fuelling Asia's credit boom.
Yet, at the right price, almost everything has value. The question is at what level does Asia become attractive and what will be the sign? Nobody is sure where currencies and interest rates will settle in a post dollar-bloc environment. In short, all the variables portfolio investors use to figure 'fair value' are in play. Will banks collapse? Can mass defaults be avoided? Are politicians capable of reform and what does this all mean for currencies? Tough questions, to which the peddlers of certainty at regional brokerages have no easy answers. The tiger economies pursued a very different growth strategy from their northern neighbours. Catch up demanded that foreign capital be imported wholesale. Despite railing against speculators, recovery seems to hinge on its return.
Trouble was, much of that money sought easy returns from fixed currencies and structural asset inflation. Investors never earned returns commensurate with the risk taken. When Malaysian companies became significant overseas investors, it should have been clear that those in the loop saw better places to put their cash.
Financial assets allowed foreign investors to earn high returns from rapid Asian growth. Many would rather have gone direct but were either barred or limited to troublesome joint ventures. Now things are different. Beggars can't be choosers and pressure to drop foreign-ownership restrictions is growing.
Already Thai finance firms are falling into the hands of foreign banks. Political and Economic Risk Consultancy argues that direct investment will replace portfolio flows. Rather than new money arriving, existing funds will be re-cycled. Debt-to-equity conversions and mergers and acquisitions will drive restructuring, it says.
Foreign creditors all but own plenty of heavily indebted Asian firms and banks. Just ask Peregrine about its exposure to Indonesian taxi firm Steady Safe.
Yet there seems more to it. Visit most Asian capitals and the number of nervous Europeans sniffing around, far from home for the first time is striking. With currencies so low, buying an entire manufacturing and distribution network in Indonesia or Thailand has never been as affordable or easy.
German firms, in particular, have been slow to invest in Asia, being naturally inclined toward eastern Europe. That hinterland will continue to dominate their attention, but many see conspicuous value and the chance to secure management control.
Asian markets remain prone to further turmoil, making portfolio investment determined by financial quotients dangerous. Less-conspicuous multinational investment being quietly negotiated behind closed doors looks the way ahead.
Having preached a creed of self-reliance and nationalism, political leaders will play down the significance. Arguments rage over IMF demands for fire sales of financial institutions, but, in truth, the disposal of strategic industries like utilities has been moving apace for years.
Amidst the turmoil of meltdown, value is hard to determine. The process of getting money back into Asia may come from old-style investing, as widget-makers and distributors of every-day consumer items are bought.
Funds specialising in distressed property have been cashed up and ready to move for the past two years. Once reality bites, banks foreclose and the pricing system is allowed to work, another asset class may be ripe for sale.
Ownership of corporate Asia may end up very different. In the minds of IMF bureaucrats and economists far removed from smoke-filled rooms at commercial banks in Bangkok and Jakarta, the process has an inevitable logic.
Perhaps, but Asian business will first have to accept the humiliation of selling out to foreigners. Crucially, that bridge has yet to be crossed.