- Asian economies have recovered quickly following their brief bouts with recession earlier this year as domestic fiscal stimulus and the recovery in the Chinese economy have helped buoy growth.
- December 1993 saw the single largest monthly gain in Asian equities since 1987, with shares rising 24% as a surge in liquidity flows at year-end sought the “Asian growth story”
- Looking back, 2009 has seen Asian equities experiencing a similar performance gap, with Asian equities rising nearly 65% versus the more modest 24% rise in US equities year to date.
2009, a repeat of 1993?
While we agree with the many commentators that suggest that the events of 2007-2009 are unprecedented, such statements, we have argued over the past year, are probably more appropriate in describing the scale of the recent crisis rather than the actual crisis itself.
Looking at the mechanics of the 2007-2009 crisis, one can find the broad framework that underpinned previous crises around the world, and in particular, given the US-centric nature of the recent crisis, the US savings and loan crisis of the late-1980s and early-1990s.
For investors, however, the similarities with the US financial crisis of two decades ago, may not end at the causes of crises themselves, but potentially include the recoveries in the economies and financial markets as well.
For those too young to recall, the boom in the savings and loan industry in the US in the 1980s led to regional real estate bubble which burst upon the industry’s collapse in the later part of the decade, leading to the US recession of 1990-1991.
The US recovery following that recession, much like the current US recovery, was described as “jobless” with unemployment staying persistently high into 1993-1994, almost two years after the US economy bottomed.
In contrast to the somber economic tone in the US during that period, Asian economies continued to grow, largely through “market share” gains in global manufacturing as the outsourcing boom picked up pace.
Similarly, today, Asian economies have recovered quickly following their brief bouts with recession earlier this year as domestic fiscal stimulus and the recovery in the Chinese economy have helped buoy growth.
This dichotomy in economic prospects in 1993 led to a near doubling (+98.8%) in the MSCI Asia ex-Japan in 1993 while the MSCI US rose a more modest 7% on the year.
Perhaps, as importantly, December 1993 saw the single largest monthly gain in Asian equities since 1987, with shares rising 24% as a surge in liquidity flows at year-end sought the “Asian growth story” and refuge from the US economic malaise.
Looking back, 2009 has seen Asian equities experiencing a similar performance gap, with Asian equities rising nearly 65% versus the more modest 24% rise in US equities year to date.
Equities were not the only beneficiary from the liquidity surge into Asian assets, with the deluge also driving up local real estate prices with Hong Kong residential prices climbing nearly 40% through early-1994, very similar to the 27% rally in prices seen year to date.
While history is useful for investors, lessons going forward will be more critical. We believe the 1993-1994 period provides this as well. While late-1993 was breathtaking in the speed of the ascent of equity markets, early-1994 was as surprising to investors in the swiftness of the subsequent decline.
Following the 24% rise in the MSCI Asia ex-Japan in December 1993, Asian equities began 1994 with a 7% fall in January 1994 which deepened to a near 22% decline by end-March 1994 as the period of extended easy US monetary policy (which began in 1990) finally reversed with the US Federal Reserve’s rate hike in February 1994.
The good news for today’s investors is that Citi does not expect the current period of easy US monetary policy to be reversed until the fourth quarter of 2010.
Indeed, Citi’s US economist Roberto di Clementi noted that the persistent weakness in US job creation which is expected to continue through mid-2010 likely precludes an earlier, overt tightening by US policymakers. Similarly, rate hikes by the European Central Bank are not expected until 2011.
However, other developments around the world more subtly suggest that the swing towards tighter policy later in 2010 has begun.
Recently, the Federal Reserve has ended its programme to buy up to US$300 billion (RM1.02 trillion) in Treasury bonds to help keep long-term rates low while its programme to buy US government-guaranteed mortgage securities is scheduled to end in March 2010.
In contrast to 1994 and similar to the subtlety of US policymakers in this cycle, recent Asian and emerging market policy shifts have tended to signal a move away from the easy policy of early-2009 and are showing signs of potentially overt tightening moving into 2010.
Indeed, over the past several months, we have seen Asian and emerging market policymakers move to address rapidly rising domestic asset prices, a fallout of easy domestic and global policy of the past year.
As noted earlier, in 1993, similarly easy policy translated into sharp rises in real estate prices throughout the region. Investors familiar with the history of the 1997-1998 Asian crisis will recall that this sharp rise in asset prices (and associated rises in leverage in Asian economies) contributed to the severity of the Asian crisis.
Recognising these risks, Asian policymakers have begun to tighten administrative measures to try to allay these concerns.
Hong Kong, typically non-interventionist in its policy, recently raised the minimum down payment required for real estate purchases while Singapore, responding to rising mass market residential prices, has sought to increase supply into the market as well as raise annual values (and thus property taxes) on HDB properties to try to cool the fervour in the market.
China most recently sought to encourage its banks to raise additional capital, signalling an unwillingness to encourage greater levels of local financial system leverage.
Taiwan, looking to address the issue at its core, has sought to stem the inflow by banning foreign investment in time deposits, thus precluding offshore “hot money” from being used to speculate on the currency.
Perhaps most aggressive has been Brazil which announced a tax of 2% on capital flows moving into fixed income and equity investments to stem inflows which had been exerting upward pressure on the currency.
While the steps taken by various policymakers have been moderate, the moves signal their intent: a reluctance to entertain more meaningful domestic currency strength while at the same time, frowning upon rapid rises in domestic asset prices.
More recently, however, the “standstill agreement” requested by Dubai World over the past week has moderated the risk of a market driven asset price surge, much like the one seen at the end of 1993 when the MSCI Asia ex-Japan rose nearly 24% in December alone.
At Citi, we remain optimistic on the trajectory of global economic recovery moving into the new year. However, increased investor caution, as we begin 2010, is warranted as the catalysts which drove global equity markets through much of 2009 lose their tailwind of government stimulus.
Like those viewing the markets in late 1993 looking forward into 1994, Citi believes that moderate expectations about return potential available in 2010 global equity markets are warranted as is a more active approach to evaluate, manage, and moderate risk within their portfolios as we ring in the new year.
Norman Villamin is Citi director of wealth management, Asia-Pacific.