Dr Doom predicts spread of contagion

PUBLISHED : Sunday, 06 December, 1998, 12:00am
UPDATED : Sunday, 06 December, 1998, 12:00am

LAST year alone, Asia's 500 richest families outside Hong Kong and Taiwan lost, on average, between 50 and 70 per cent of their net worth, investment adviser Marc Faber says.

'A large number of these families' private investments, including factories, hotels, commercial and residential properties, boutiques for the mistresses, golf clubs, casinos, and so on, will lose money for a long time and may even become white elephants,' he said.

But Asian bulls are starting to argue that following the currency devaluations, Asian countries' exports will be cheap again and start to expand. At the same time, impoverished citizens will buy less, causing imports to decline. This will bring about an improvement in trade and current account balances.

Mr Faber has problems with this scenario. The beneficial effect of the recent Asian currency devaluation should not be overestimated, he warned.

'Mexican and Chinese labour costs are still lower than their equivalents in Thailand, Malaysia, Indonesia, and the Philippines.' Mr Faber believed Thailand and other Asian countries would continue to suffer for a long time.

'Domestic consumption indicators are all in negative territory, so imports are likely to continue to decline,' he said.

Foreign direct investments were also likely to fall, possibly sharply. After all, he said, who would want to build a factory when consumption was collapsing and over-capacity was part of the problem? Also, infrastructure projects which have a high content of imported materials would either be abandoned or postponed. So, if imports of consumer and capital goods declined, it would curtail exports from the industrialised countries, especially Japan.

The United States and Europe would suffer too, he said. In 1995, the 10 leading Asian developing countries imported US$748.4 billion worth of goods from around the world. Given the size of that figure, the prospect of Asian imports stagnating or declining quite sharply should be disconcerting to bullish pundits.

To put the size of Asia's imports in perspective, Mr Faber said that in 1995, the imports of now-virtually bankrupt South Korea were 40 per cent the size of those of mighty Japan.

If Asian imports declined, the industrialised nations' economies would have to be affected, he said.

After the equities tumble of 1987, the recovery of many industrialised countries was fuelled by strong export growth to developing countries. So, Asia would buy less from the industrialised countries, and they, in turn, would have less money to spend on items from Asia, or on direct investments in the region.

'In short, this is a vicious circle similar to that in the 1930s,' Mr Faber said.

Investors should always be wary of countries that depend on large foreign capital flows in order to sustain their excessive spending, he said.

This is an edited extract from 'Riding the Millennial Storm: Marc Faber's Path to Profit in the New Financial Markets', by Nury Vittachi, published by John Wiley Inc.