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The resilient Asian emerging markets

September 22, 2003

Asia's rapid economic progress was once characterised as a miracle. Its contribution to world output has doubled since 1950, it accounts for one-fifth of the world exports and currently attracts one-third of all foreign direct investment. Poverty levels have declined dramatically.

This article presents the improvement in the region after the crisis, analysis of the performance of the regional stock market index, emphasises on the secular long-term trends and identifies the risk factors on a forward looking basis.

The Table below is a scorecard which reflects the resilience of the region. Unlike Latin America, where the crisis in the early '80s, led to the lost decade, Asia has surged back quite rapidly. The strong export potential of the region is the underlying factor which had led to its rejuvenation after the 1997 crisis.

Key Macro Parameters for Major Asian Countries


Cumulative Annual Growth (%)
Exports of Goods in foreign exchange reserves External Debt

Reduction in 

GDP growth 
rate (%) for 2003

% of GDP

between Sept 1998 to Sept 2003

to GDP %

interest rates %








Hong Kong




































South Korea


















India has the lowest exports to GDP ratio in the region. The countries, which were worst affected by the crisis: Thailand, Indonesia and South Korea, have a large proportion of their GDP from exports. This enabled them to generate the hard currency revenues to pay back the debt.

Both South Korea and Thailand have paid back the International Monetary Fund loans ahead of schedule. Indonesia will not be renewing the IMF lending programme at the end of 2003, but will enter into post-programme monitoring with the IMF.

The traumatic experience of the economic crisis has led countries in the region to accumulate reserves over the last five years.

Though not directly affected by the crisis, India has one of the highest cumulative annual growth rates in reserves accumulation in the region.

Most countries in the region are stable in terms of the ratio of external debt to GDP except probably the Philippines.

Interestingly, India's external debt to GDP is close to Singapore.

The success on the external front in terms of stabilising their currencies and lower inflation has led to a decline in interest rates.

Over the last five years, short-term interest rates have declined significantly due to domestic as well as global factors.

India and China are the two growth engines of Asia. Other countries in the region will grow above 3.0 per cent except Hong Kong, Singapore and South Korea.

The region suffered a temporary slowdown due to uncertainties from the war in Iraq and the SARS epidemic, but it is back on the growth track.

While currencies in the region have become more flexible to closely reflect fundamentals, some of them may be persistently undervalued like the Chinese currency.

Asia has gradually regained its growth dynamics and more importantly it has been accompanied by greater financial stability.

Net foreign capital flows to the region stand at approximately 3 per cent of regional GDP. We will evaluate if this economic performance has translated into stock market performance.

The first phase was between December 1987 to October 1994; the index rose from 100 to 395.9, a whopping 296 per cent.

The next phase was between November 1994 to July 1997; though the regional economic performance deteriorated, the massive flows of capital sustained the index.

By July 1997, the index had dropped by only 16 per cent. The Asian crisis, which began in July 1997, was a rude awakening.

The third phase was between July 1997 and August 1998; the index dropped from 333.8 to 106.5, a massive 68 per cent.

The fourth phase was between September 1998 to March 2000; the index synchronised with the Nasdaq bubble. The technology sector intensive region saw the index surge by 144 per cent during that period.

The fifth phase was between April 2000 and March 2003; the region had been hit by global economic slowdown, global terrorism, Sars epidemic and the Iraq war.

Again, the index declined by 44 per cent. We are now entering the sixth phase, with the index having surged by 41 per cent between March and August 2003.

The key issue is whether this will lead to a secular bull market like the one witnessed in the early 1990s, or will it just flip.

The key factors behind this rally are valuation, stable macro variables and sentiment. The Asia ex Japan index is now trading at 12x trailing earnings. The S&P 500 is trading at 32x reported trailing 12-month earnings. On a regional basis, Asia ex-Japan is still cheap.

As pointed out in the Table above, the countries in the region have stabilised their currencies with a war chest of foreign exchange reserves; inflation has been reigned in especially in Indonesia; lower interest rates due to massive domestic liquidity and restructuring of the banking sector have led to an overall stable macroeconomic situation.

Emerging keeps track of the capital flows into different emerging market fund categories. This is a fairly good indicator of investor sentiment.

Notice that after July 2003, Asia ex-Japan funds have not only had the maximum cumulative inflows but also more net cumulative inflows than all other funds combined.

There are other long-term trends, which point to the underlying dynamism in the future. Two factors stand out: Demographics and inter regional trade. It is estimated that by 2010, 60 per cent of the world's population in the age group of 20-34 will live in Asia.

This will lead to massive growth in a new class of consumers demanding everything from housing, consumer products, best services for transportation, education and healthcare, entertainment and a high quality of life.

It is projected that this growth will enable Asia to contribute 52 per cent of the world's GDP by 2029, surpassing the contribution of the GDP of North America and Europe combined at 43 per cent.

The intra regional exports between East Asia (Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand) increased from 18.9 per cent in 1980 to 27.4 per cent in 2000.

China is emerging as a powerful growth engine for the region.

In 1980 it imported only 6.3 per cent from East Asia and by 2000 it was importing 39.5 per cent from the region. In 2003, China's imports are projected to be $ 350 billion.

Investors must be cautious as the present rally is driven by a rise in global risk appetite. There is also the feel good factor that the massive fiscal stimulus unleashed in the US, coupled with excess liquidity in the global financial system, must reinvigorate growth.

If global growth does not materialise as expected, then predominantly export oriented economies in the region will see a slump in growth.

Countries such as Thailand are taking steps albeit populist, to boost domestic demand such as promoting housing and raising farm income.

Asia ex-Japan is now correlated closely with the financial cycles in developed countries. For example, the correlation between S&P 500 and MSCI Asia ex-Japan is close to 0.71. The rising correlations with developed markets mean that the region will remain susceptible to booms and busts associated with financial flows and asset prices.

Asia has demonstrated its resilience, having recovered from the debilitating crisis of 1997.

The region should shed its obsession with the export-driven growth model and start focusing on sprucing up domestic demand in a sustainable manner.

The countries, which focus on creating domestic demand, are the ones that will attain their true potential in the long-term.

Investors must carefully discriminate between the countries geared heavily to global growth and the ones with a robust domestic demand.

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