Battered Asia fit enough to lead race to recovery

PUBLISHED : Tuesday, 22 September, 1998, 12:00am
UPDATED : Tuesday, 22 September, 1998, 12:00am

Asian markets have taken a mighty beating at the hands of investors during the past year, but they are not the only emerging markets to have suffered. Others are doing much worse.

The three charts below give a rough picture of the comparative performance. They show the average regional performance of stock market indices in local-currency terms, weighted by gross domestic product.

This is not the best way of doing it. It is better done in US dollar terms weighted by market capitalisation. The difficulty, however, is that up-to-date figures for market capitalisation and exchange rates for Latin America or eastern Europe are not available on every commercial data base (or cost more than the benefits an Asian newspaper can get from them).

So GDP and local currency it is. The charts start from July 1, 1997, just before the financial crisis broke in Asia, with a base of 100 for that date. For Asia they exclude Japan, as Japan is not an emerging market, and mainland China, because its minuscule B-share markets would otherwise be given much too great a weighting with the mainland's GDP.

The first chart shows that Asia plummeted earlier and further than Latin America last year, but, since late March this year, it has been Latin America that has led the downward charge. The latest figures for Latin America show a slight up-tick, but this has all the hallmarks of a dead-cat bounce (even a dead-cat will bounce if dropped from the top of Exchange Square).

But it is Russia that truly makes Asian markets look good. This market was still a darling of foreign investors up to October last year, when, on our index, it stood at 130. The present value of this index is 14. Remember that this is in local-currency terms. Pick a rouble exchange rate, almost any will do, and Russia's vanishing act is complete.

Now, for comparison, take Asia on the local-currency GDP-weighted basis and contrast it with the more appropriate US dollar market cap weighted scheme (it is possible at least for Asia).

The result, shown in the third chart, is that the more appropriate way of doing it also makes Asia look worse, but not a great deal worse. We have plenty of company now, no matter how you look at it.

This columnist has a failing for optimism. Asians are still the world's biggest savers, they have kept inflation low, they have tightened their belts on imports and seen their trade balances surge into surplus, they generally have fiscally responsible governments and these governments have now tackled the problems that face them head on.

Look for a better record the next time these charts are presented.