Expect to Encounter More Pain in Asia

Asia’s battered stock markets and currencies finally bounced in the first quarter, but whether the rebound will be long-lasting is an open question.

The Asian economic crisis that began last summer reached at least a near-term bottom in mid-January, when the region’s markets were slammed by fears that Indonesia’s economic and political situation was spiraling out of control.

But as Indonesia stabilized after its government pledged to take tough steps to restore confidence, markets and currencies across Asia also stabilized--and then rallied:

* In South Korea, the benchmark stock index rocketed 34% from Jan. 1 through last Friday, and gained even more--55.8%--in U.S. dollar terms as the South Korea currency, the won, rebounded sharply.

* The Malaysian stock market gained 22.4% through Friday in the native currency and 33.1% in dollar terms. In 1997 the market lost 69% of its value in dollar terms, as investors pummeled stocks and currencies across the region on worries over mounting debt levels and trade deficits amid slowing economic growth.

* Hong Kong’s Hang Seng index was up 9.4% through Friday. It had plunged 20% in dollar terms last year.

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Still, for most U.S. investors owning Pacific Rim mutual funds, the first quarter was hardly something to boast about. For Pacific funds that typically exclude Japanese stocks from their portfolios, the average gain for the quarter was 5.7% through Friday, according to fund tracker Morningstar Inc. in Chicago.

That was less than half the return for the typical U.S. stock fund, and far below the 19.8% gain of the average European stock fund.

Funds that specialize in Japanese stocks rose 5.4% for the quarter through Friday. And on Monday half that gain disappeared as the Japanese stock market again began to tumble on worries about the country’s beleaguered economy.

Indeed, some analysts fear that even the relatively subdued first-quarter optimism--that the worst might be over for Asia--may be misplaced.

Businesses from Tokyo to Bangkok to Jakarta are unsure of the prospects for a quick recovery, even though markets have bounced.

“We’ve got a big hill to climb for the next two years,” said Akira Takeda, president of Hino Motor Sales Ltd., the sales arm of Japan’s largest truck maker. Takeda’s comment came after he announced his company is cutting output 15.5% this year because of Asia’s ills.

That hill is a mountain in Indonesia, Thailand and South Korea, all of which are bracing for recessions. There, companies are finding it hard to finance their operations, with many defaulting on debts, shutting factories or closing down altogether.

In Indonesia, prices and joblessness are soaring, and an estimated 80% of the companies in the benchmark stock index are swimming in so much foreign debt--$71 billion total at last count--as to be technically insolvent.

Indonesia’s economy may contract as much as 5% in 1998, and that means more troubles in the world’s fourth-most-populous country.

Thailand’s stock market has surged 54% in dollar terms so far this year, after diving 76% last year. Yet the country’s success in converting last year’s ballooning trade deficit into a surplus--one condition of the $17.2-billion bailout supplied by the International Monetary Fund--has occurred because consumer spending and imports collapsed, not because exports are booming.

In South Korea, once-mighty chaebol, or industrial groups, are debt-strapped and under pressure from new President Kim Dae Jung, who wants them to slim down their operations. Kim is also moving to make it easier for international companies to buy South Korean businesses and give the chaebol more competition.

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Meanwhile, South Korean department stores run by Keum Kang Development Industries, at which sales have collapsed 30%, are turning into ghost towns. “Customers are still staying away,” said Kum Kyu Shik, a marketing official at the company.

And then there’s Japan, whose government just rejected calls for a personal income tax cut in favor of more traditional pump priming in the form of spending on roads, bridges and other infrastructure.

Absent some stimulus to consumer spending, Japan is in little position to shore up its neighbors. And that’s what prompted Deputy U.S. Treasury Secretary Lawrence Summers last week to specifically call for Japan to take “strong action,” including tax cuts, equal to 2% of gross domestic product.

Japanese purchases from elsewhere in Asia plummeted 17.3% in February, and Mitsubishi Motors Corp. and others are shutting factories in Thailand and elsewhere.

Economists expect that for the 12 months ending today, Japan’s economy actually contracted--the first time that’s happened in almost a quarter-century.

The bright spots in Asia are Taiwan and China, which seem to be weathering the storm. Yet they will record slower growth this year as well.

For U.S. investors interested in bargain-hunting in Asia for the long term, analysts urge caution--especially with corporate bankruptcies on the verge of soaring in most Asian nations.

Still, if the best time to buy any market is when the gloom is thickest, any pullback in the second quarter, after the first quarter’s rebound attempt, might offer a good entry point for gutsy investors.

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Bloomberg News was used in compiling this report.

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Indonesia’s Bounce

Indonesian stocks have bounced from their lows, but even at current levels they may be overvalued, analysts warn. Indonesia composite stock index, monthly closes and latest:

Monday: 541.43

Source: Bloomberg News