Time to Buy Back the Farm
|Oct 4, 2008|
In the fall-out from the financial crisis in the west, Asian investors do not necessarily have to feel sore about their collapse of their own markets and a sharp fall in some of their currencies. They now have a golden opportunity to buy their own stocks on the cheap.
The reason is very simple. The foreigners are the main impetus behind falls in local markets. For example, they have sold a net US$25 billion dollars or so of stock on the Korean market, mostly big companies like Samsung and LG. That amount is equal to almost the total market capitalization of Korea ten years ago (US$30 billion).
Foreigners have been net sellers of the Thai market for all but two of the last twelve months, with most of the buying coming from individual local investors and a small amount from local institutions. More recently funds have also been exiting Malaysia in the wake of the fall in the price of palm oil, and the political uncertainty.
The foreign investors often like to present this exodus as evidence of the vulnerability of Asian markets to economic downturn in the west. For sure, Asian exports will undoubtedly suffer, and many an Asian financial institution has been landed with large chunks of now worthless western debt. But the reality is that foreign selling is primarily being sparked not by conditions in the region itself but by the need, particularly of hedge funds fearing massive withdrawals, to raise cash while they can. In turn this has weakened currencies such as the won and baht despite their relatively strong current account positions and large foreign exchange reserves.
It is indeed remarkable that Asian countries with a relatively strong fiscal situation and external balance sheets have suffered at the expense of a US dollar being printed in ever increasing amounts to bail-out a system in ruins.
The silver lining of all this is that it gives local investors a chance to “buy back the farm” at lower prices. Total foreign ownership of the top ten Korean stocks has fallen by three percentage points this year to 30 per cent. At one point it had been over 40 per cent. Koreans in particular – but other Asian markets too – were always sore that in the wake of the Asian crisis foreign portfolio investment was liberalized, enabling foreigners to pick up large stakes in wounded local companies at very low prices. Now locals, including the national pension fund, can at least regain a little ground, and at prices down 25-40 per cent from a year ago and currently on price earnings ratios averaging 10.
Indeed, the lowest PE ratios in the world are now mostly to be found in Asian countries with strong external situations and relatively conservative monetary regimes. Taiwan and Thailand are on PEs of only 8 and have 5 per cent dividend yields! By contrast the main benchmark of the chronically sick US market, the S&P500 is on a PE of 14 and yields of 3 per cent.
For sure, those ratios will likely rise and yields fall in Asia as elsewhere as recession bites. But it beggars belief that countries with strong fiscal and external positions are somehow worse off than the United States and United Kingdom markets.
Unfortunately however, Asians with cash on hand seem a little too eager to buy struggling US trophy names even at what can hardly be considered fire-sale prices. That time will come, but it certainly has not arrived yet as the US stretches every sinew to prevent asset prices falling to market clearing levels.
Asian investors would do better to use that cash to buy up some of their own stocks first, in the process also repatriating funds held offshore and giving some relief to their local currencies. Export-led growth is not going to return any time soon so stronger currencies will help boost domestic demand.
Excessive caution is at work as Asian markets and central bankers re-live the nightmares of 1998. Korea, for example, could have done a lot more to defend the won. Its foreign reserves are far in excess of real needs (seven times those of Australia, a similar sized economy). But spending even a small amount of them to support the won is greeted with almost hysterical fears locally as well as by the foreign media.
As for cash rich private sector investors, corporate and individual, particularly those from Taiwan and Malaysia who have been expatriating huge quantities of capital for years, it is time to ask: how much money have they lost by believing in American financial whiz kids who sold them now worthless structured products? Surely this is the time to take your capital home and buy shares in local companies which actually produce tangible things like computers, tires and noodles which people will continue to need.
Yes, East Asia is in for a hard time. But keep your money here. The US bailout of a busted system will not ultimately be financed just by US taxpayers. It will be paid by all those foreigners who continue to believe that US debt is a safe haven.