Last week I attended a full-day business conference “ASIA: Restructuring in Action,” at NYU’s Stern School of Business. There, professors and industry experts met to discuss how post-crisis Asia was progressing. We discussed macroeconomic trends, the restructuring of the Asian banking sector, and the economic effects of new technologies. The conference reflected “conventional wisdom” within the investment community about Asia, so I thought our readers might enjoy a brief summary of it.
The first Asian equity strategist spoke about the outlook for Asian economies and stock markets. He presented a common view that in the short-term things may look worse economically for Asia, due to the slowdown in the U.S. and Japanese economies. Yet he thought that because of low valuations, ongoing restructuring, and the potential for current negativity to reverse, Asian stocks could perform well over the coming year. In the long run, he thought most Asian economies could return to 6% annual growth.
A panel of four discussed the topic of Asian macroeconomic issues. The tone was sober, as most recognized that Japan was sliding back into recession. The panelists suggested that Japan needed political reform and corporate restructuring to boost competitiveness, and this would be much more effective than short-term stimulation. A representative from Standard & Poors provided input on ratings trends in Asia, noting that in Emerging Asia, 72% of banks are assigned a “stable” outlook, 15% a “positive” outlook, and 13% a “negative” outlook. Among Asian sovereign rankings, 55% had a stable outlook, 27% positive, and 18% negative. In terms of relative banking industry risk in Asia, Australia, Singapore, and Hong Kong were considered the strongest systems, while China, India, and Indonesia had among the weakest banking systems. Singapore’s and Hong Kong’s banking system was considered less vulnerable to a global slowdown, while Japan, Indonesia, and China were considered more vulnerable to a global slowdown.
Another panel further discussed the topic of Asian banking system reforms and debt markets. Representatives from Moody’s discussed Asian banking systems. In countries like Korea, Thailand, and Malaysia, problems persist but restructuring has become a high priority. One factor needing improvement throughout Asia, is the development of stronger credit culture – meaning that banks need to base lending decisions on realistic risk assessment and profitability expectations, rather than government or non-economic influences. China was singled out as the weakest banking system, being totally controlled by the government. The Moody’s analyst pointed out that year after year, Chinese banks lend money at about a 5% loss. Thus bad loans now represent an estimated 50% of assets in the banking system. Chinese banks are considered insolvent, but can continue operating because citizens remain net depositors. Ultimately, because the government directed most loss-making loans, the government is expected to assume responsibility for them, and bail out the banks. Moody’s estimates a government recapitalization of the banking system would cost 40% to 80% of GDP. Regarding Asian debt investments, participants generally thought that Asian bonds offered unattractive risk-adjusted returns compared to Latin American bonds.
The final panel discussed opportunities for new technologies in Asia. Much was made of the success of Japan’s “i-mode” internet-browsing cellphones, offered by NTT DoCoMo. There was the general belief that successful technology advances must be designed as consumer products, with customer preferences more important than the technology itself. Another important topic of discussion was the consensus that globally, software programming would increasingly be outsourced from India, where there is a pool of high-quality talent willing to work on projects for prices under half those charged by organizations in developed countries. Some members suggested that the tech slowdown could even accelerate India’s outsourcing business, as IT managers cutting budgets would seek lower-cost services.
My conclusions on the conference: Most of the participants focused on long-term structural issues, and believed that while the process of reform is still in its early stages, things are slowly moving in the right direction. The speakers appeared to be cautious in the short run, but fairly optimistic about the long run, a typical stance to take during market downturns. This caution and worry, if it diminishes over time, could provide the stimulus for the next Asian stock market rally.