Now That the Tigers Have Been Tamed, Is It Time to Embrace Them?

When emotion takes over, logic beats a hasty retreat. So it is with hysterias fueled by the untimely death of princesses . . . and, more appropriate for this page, with hysterias in financial markets.

Until late last week, most Southeast Asian stock markets had been in the grip of panic selling since early July, as their currencies plunged in value and 15 years’ worth of optimism about the “Asian economic miracle� seemed to evaporate.

On Friday, finally, those beaten-down markets rallied sharply, spurred in part by the Malaysian government’s decision to give up its absurd efforts to simultaneously blame foreign investors for the carnage while also restricting their ability to trade in Malaysian shares.

After plummeting 21% between Aug. 20 and last Thursday--the equivalent of the Dow Jones industrials’ sinking from Friday’s close of 7,822.41 to about 6,180, in less than two weeks--the main Malaysian stock index rocketed 90.47 points, or 12.4%, on Friday to 821.59.

Likewise, Indonesia’s main stock index zoomed 11.3% on Friday after diving 33% between Aug. 4 and last Tuesday; Thailand’s key index rose 3.5% on Friday, after losing 28% between July 29 and last Monday.

Despite Friday’s gains, these markets and others in the region remain by far the world’s most distressed collection of stocks in 1997. Year-to-date, Malaysian stocks are down 34% in local currency terms and down 43% in dollar terms (because of the currency devaluation); Philippine stocks are down 46% in dollars.

Disastrous losses? Of course, if you were unfortunate enough to be in these markets. But many investors today ought naturally to have another thought: Isn’t the best time to buy almost any investment precisely when highly emotional, panic selling is at its worst?

In other words, if you believe it’s smartest to “buy low, sell high�--and why wouldn’t you?--shouldn’t you be putting a little money into the most depressed markets you can find today?

Over the last decade, there have been plenty of cases where the payoff from buying into sudden and deep market declines was terrific. Think about the U.S. stock market crash on Oct. 19, 1987; the Hong Kong stock market’s dive after the 1989 Tienanmen massacre; the U.S. junk bond market’s collapse in 1990-91; and the Mexican stock market’s plunge in late 1994 and early 1995.

In each situation, securities were being surrendered at prices that the sellers regretted not all that long afterward.

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Still, that hasn’t been the universal case with collapsing markets in the 1990s. The greatest exception is well-known indeed: Japan’s stock market crash in 1990 and 1991 left the blue-chip Nikkei-225 index at 23,000 by the end of 1991, down 41% from its late-1990 peak. Today, the Nikkei is at 18,650--19% below what might have appeared a bargain to many at the end of 1991.

Japan’s seven-year market depression raises the obvious question: Will Southeast Asian markets follow that pattern, or the Mexican model of a relatively fast recovery?

Like Mexico, the underlying problems of Southeast Asian economies, after years of rapid growth and heavy investment, were revealed first by the collapse of their currencies--a reaction to rising trade deficits, slowing export growth, and, especially in the case of Thailand, a debt burden that now is unserviceable.

But also like Mexico, Southeast Asia has young economies with young populations and still-low wage rates--demographics that imply there is substantial growth ahead for them. By contrast, Japan’s burdens include an aging population and a high cost structure, problems that have clearly worked against the country as it has struggled to recover from its economic crash.

What worries some investors, however, are the similarities they see between Southeast Asia and Japan in terms of government policy. Like Japan, many Southeast Asian governments have for years failed to fully embrace the idea of economic deregulation and free capital flows, a stance best reflected in Japan’s unwillingness to allow market forces to cleanse its banking system of the scourge of bad loans left over from the 1980s bubble economy.

Mexico was forced by the U.S.-led bailout of 1995 to further open its economy and its markets, which in turn fortified investor confidence in the country and set the stage for the economy’s recovery.

In the current Southeast Asian crisis, the reaction of Malaysia’s government has been particularly aggravating to investors. First, the government blamed the currency’s decline on foreign speculators. Then it tried to restrict trading in its stocks--which only made a bad situation worse.

By Friday, however, the government was in retreat. Wisely, it lifted the trading restrictions. And in another sign that it understands what the market is telling Malaysia, it said it would postpone several large infrastructure projects that would have further indebted the country.

In Indonesia, meanwhile, the government last week scrapped a law that had limited foreign ownership of publicly traded stocks--a move that will in effect make the country’s market one of Asia’s most open.

Still, many analysts caution that the economic fundamentals in the region won’t turn on a dime. Postponing infrastructure spending, notes Morgan Stanley Dean Witter economic Tim Condon in Hong Kong, will slow growth, which in turn “may lead to debt-servicing problems� for more Southeast Asian companies that had been leveraged for very fast growth.

Indeed, he expects the Thai economy to continue contracting through 1998, as many lending concerns fail and the economy shifts away from heavily leveraged domestic consumption and toward more manufacturing for export (which the currency devaluation will abet).

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Paul Matthews, of Asia-focused Matthews International Capital Management in San Francisco, likewise expects a long recovery process for many Southeast Asian countries. Even so, he was buying Indonesian stocks early last week, and is looking to do the same soon in the Philippines, drawn by what he estimates are stock price-to-earnings multiples in the low teens.

John Tobey, editor of the Closed-End Fund Investor newsletter in Boston, also is recommending Asian shares now--specifically via diversified funds like the Morgan Stanley Asia Pacific fund, traded on the New York Stock Exchange.

But one veteran emerging-markets stock fund manager who was savvy enough to escape the Asian markets’ debacle counsels caution. “It’s still too early,� says Mark Madden, head of the Pioneer Emerging Markets fund in Boston. He worries that, after a 15-year boom, asset values remain inflated throughout Southeast Asia relative to their true economic worth in a more competitive world.

He expects the bottoming process in Southeast Asian stocks to take another six to 18 months. Even so, he adds, “I’m still highly confident that we’re going to make a lot of money in Asia over the next three to five years.�

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Asian Options

Investors who are interested in betting specifically on Southeast Asian stocks have a number of options. A sampling is shown in this table. The first list shows some closed-end funds that invest in the region or in individual countries. Note that the stock prices may trade above or below the actual per-share value of the stocks in the portfolio (the “net asset value,� or NAV). A good source for checking the most recent relationship between stock price and NAV is Barron’s magazine. The second list shows some open-ended mutual funds that target the region. The third list shows some individual Southeast Asian stocks trading in U.S. markets. Closed-end country/region funds

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NAV Fri. stock Fund/ticker symbol at 8/29 price Asia Pacific (APB) $12.78 $10.69 Fidelity Emerg. Asia (FAE) 14.81 12.38 First Philippine (FPF) 10.57 10.00 Indonesia Fund (IF) 6.33 8.63 Jakarta Growth (JGF) 5.94 7.19 Malaysia Fund (MF) 9.05 10.56 Morgan St. Asia-Pacific (APF) 11.54 9.25 Schroder Asian (SHF) 11.56 10.31 Scudder New Asia (SAF) 14.94 12.75 Singapore Fund (SGF) 10.20 11.13 Thai Fund (TTF) 7.75 12.13

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Open-ended Pacific-region funds *--*

Year-to-date Fund Phone number total return Fidelity Southeast Asia (800)-544-8888 --14.0% Matthews Intl. Pacific Tiger (800)-789-2742 --7.9% Merrill Lynch Dragon Fund (800)-637-3863 --18.3% Morgan Stanley Asian (800)-282-4404 --17.0% T. Rowe Price New Asia (800)-638-5660 --15.7% Scudder Pacific Opportunity (800)-225-2470 --13.6%

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Individual stocks *--*

52-week Fri. Stock/countryticker symbol high/low close Asia Pac. Wire & Cable (Singapore)(AWC) 14.06-9.25 11.88 Asia Pulp & Paper (Singapore) (PAP) 15.38-9.75 13.31 China Yuchai (Singapore) (CYD) 7.13-2.75 3.06 Indosat (Indonesia) (IIT) 35.13-21.13 26.81 P.T. Telekom (Indonesia) (TLK) 36.88-18.75 23.56 P.T. Tri Polyta (Indonesia) (TPI) 8.25-3.56 4.00 Philippine Long Distance (Phil.) (PHI) 34.50-24.81 27.63 Webs Malaysia (EWM*) 16.13-7.69 8.69 Webs Singapore (EWS*) 12.69-8.50 9.25

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* trades on American Stock Exchange. All others trade on New York Stock Exchange. Source: Times research