Originally created 01/18/98

Asian crisis shocks strategists



Last May, just one month before the wave of financial distress began to break over Asia, Money magazine ran an investing story with this headline:

"How to Cash In on the Asia Boom; Every Investor Today Ought to Take a Hard, Close Look at the Dazzling Promise of the Pacific Rim. Here Are Four Gateways to Earning Spectacular Profits in the World's Fastest-Growing Economies."

Relying on information from highly paid Wall Street analysts, economists and investment strategists, Money praised the "economic miracle taking place today around the Pacific Rim" and declared: "No investor today can afford to ignore the opportunities the Pacific Rim offers."

A month later the Thai baht plummeted, triggering the most frightening regional economic and financial collapse since the 1930s -- a crisis that has destroyed more than $1 trillion in wealth, according to financial analysts.

And what does the author of that Money article have to say, in retrospect? "Everyone is genuinely surprised by the decline. I certainly am." said Michael Sivy, the magazine's chief investment strategist.

Mr. Sivy does not lack for company. Many journalists wrote enthusiastically about Asia in the year before the bubble began to burst. Their number included James K. Glassman, investing columnist for The Washington Post, who wrote favorably about Asia and other emerging markets in mid-1996 and again in March and April of last year.

Journalists were not alone in misjudging the robustness of the Asian miracle. A Wall Street Journal roundup of economists in June 1997 reported that more experts picked Asian stock markets, excluding Japan, to be top performers in the following 12 months than chose the United States, Europe and Japan.

"I have never seen such massive self-delusion as in Asia. Not just by the press but also by the financial community, governments, companies and even the International Monetary Fund," said Marc Faber, a veteran Hong Kong-based global investor and analyst who was one of the very few to predict Asia's troubles.

The lesson for investors, according to chagrined analysts and journalists, is that the public ought not to put too much faith in forecasts proffered by Wall Street or the financial media. Predictions about the future are inevitably based on past experience -- which isn't always a reliable guide.

"I would say to the reader, `You have to be skeptical about everything,"' Mr. Glassman said.

History shows that the experts seldom spot important market turns. Most analysts were bullish on U.S. stocks before the October 1929 crash. In 1989, few analysts predicted that the Tokyo stock market, then at an all-time high, would plunge and stay down for years.

Asian investing, too, was never more popular than in the months leading up to the current crisis.

U.S. mutual fund investments in Asia peaked in August 1997 at $38.5 billion, according to Robert Adler, head of AMG Data Services in Arcata, Calif., which tracks mutual funds. Asian stock mutual funds proliferated throughout last year, according to Mr. Adler. As of the end of December, there were a record 185 Asian stock funds.

As they were touting Asian opportunities, most pros missed the dangers that were staring investors in the face.

"We do not get a very good grade for spotting Asia's problems, I am afraid to say," said Richard Farrell, a portfolio manager for two Asian stock mutual funds sponsored by Guinness Flight Global Asset Management, a British investment company.

Analysts cite several reasons for the failure, including the fact that so many analysts were linked to the same big financial houses that were part of the bubble economy.

"The bubble was created by an over-extension of credit by foreign lenders and investors to these Asian countries. When you are part of the problem, the chances are you cannot have predicted it," said Rao Chalasani, chief investment strategist at Everen Securities in Chicago.

Another reason for the ill-timed touting of Asia was the permanent bull-market mentality that had developed among analysts after years of ever-rising Asian economies and financial markets.

"This was a region of the world where political institutions worked. People were reasonably well-educated. There was a high savings rate. Strong family values. Belief in the social order. And these were economies in the early stages of development," Mr. Sivy explained. "Anybody who covers investing is always going to write positively about the sector that is hot -- even though past performance does not predict future performance. It would be weird not to."

Too little deep research was done by Wall Street's economic and financial analysts, sources said. Despite their high pay (analysts typically earn hundreds of thousands of dollars a year), they did not cover Asia very well, according to other financial insiders. The lack of good financial intelligence lulled people into a false sense of complacency about the region.

"There was not a lot of good research done to explain why Asia's high growth rates were sustainable," said Todd Bucholtz, a former analyst at the global investment firm Tiger Management who now advises private investment funds. "The analysts are spread pretty thin, covering five to six countries apiece. And they spend a lot of time in Frankfurt, New York or L.A. selling the Asian story to their firms' clients."

The failure to sound the alarm on Asia also may have stemmed from Wall Street's eagerness to market Asian investment products -- and thereby make money off the huge Pacific Rim operations many houses have established in recent years.

"Journalists rely on the investment houses, who are not only fallible but also have a stake in promoting these investment ideas," Mr. Glassman said. "A lot of (the promotion of investment ideas) is fed by the investment houses with an ax to grind."

Mr. Faber contended that some investment banks played down bad news because of their financial stake in Asia.

"I know of three continental European financial institutions who told their analysts to tone down negative assessments of certain countries in the region because the firms were negotiating deals with Asian companies or governments," Mr. Faber said. "The analysts, who were beginning to see the cracks appearing in early 1997, were shut up."