The Vulnerability of Asian Markets Then (1997) and Now (2013)

Aug 20, 2013

The Vulnerability of Asian Markets Then (1997) and Now (2013)

By Vincent Cignarella

It was a toxic combination that sparked the Asian financial crisis in 1997. The bad news is that same combination–of Federal Reserve monetary tightening and Japanese fiscal tightening–is looming once again. Rewind to March 1997. Then, the Fed’s communications policy bore little resemblance to the current era of transparency, so inevitably some investors were taken aback when the central bank raised the discount rate, the rate at which the Fed lends money to commercial banks, to 5.5% from 5.25% after two years of trimming rates. (Remember, this was before fed funds targeting was in vogue.)One month later, in April 1997, the Japanese government raised a nationwide consumption tax to 5% from 3%. This was seen at the time as a major contributing factor to Japan’s economy falling into a recession in Q41997.

Fast forward to today. The Fed is expected to usher in the beginning of the end of its bond-buying program, put in place after the financial crisis to stimulate growth. Whether the Fed makes a move in September or December will ultimately become a footnote in history. What’s important is that this tapering right now looks inevitable.

Meanwhile, Prime Minister Shinzo Abe is weighing an increase in the same exact consumption tax, to 8% starting April 2014 from the current 5%.

No wonder emerging markets in Asia are freaking out. By any measure, that’s a lot of money that’s going to stop making its way into the financial system. Say bye-bye to the search for yield and those “hot money” flows that propelled those markets higher.

Asian emerging-market currencies are bearing the brunt of the pain. In the four months since April, the Thai baht is down 10% against the dollar, the Indian rupee has fallen by more than 16% and the Indonesian rupiah is down 11.4%.

The question remains: Is this 1997 all over again?

So far, the market moves have been milder. A big reason: Many currencies back then were set at a fixed exchange rate against the dollar. Unmoored, the baht plunged 40% in four months after the central bank was forced to let it float in July 1997. A similar fate met the Indonesian rupiah when the crisis made the managed float rate impossible.

There are other differences this time around, as well. Before the Asian financial crisis, Japan helped drive the growth of the developing countries that neighbored it. This time around, China plays that role. And for all the hand-wringing about China’s growth outlook, no one is making any comparisons between China today and Japan in 1997.

So what’s an investor to do?

My approach: Keep close tabs on the dollar, especially how it trades against the yen. During the Asian financial crisis, investors looking for a safe place to camp out piled into the dollar. In April 1997, one dollar bought about 106 yen. By August 1998–at which point the crisis had spread to Russia and was causing U.S. stocks to reel–one dollar was fetching about 147 yen.

If the dollar begins to gain rapid ground against the yen, the Asian cold may turn into the Asian flu–a bug we’re all likely to catch.

(Vincent Cignarella is a currency strategist/columnist for DJ FX Trader and co-inventor of The Wall Street Journal Dollar Index. His 30 years in currency markets include working as a bank dealer at major money-center commercial banks; managing corporate-hedging for a large multinational; serving as a principal and general partner of a major currency brokerage firm; and most recently working in FX sales with Santander in New York.)

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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