by Chris Elkins
Published: July 27,1998
I have a headache. This is not your ordinary, run-of-the-mill, ache. This is the blinding ache of a migraine…the kind that convinces you your head will explode any minute. I think I got it from trying to figure out this Asian crisis thing.
The news is full of it…Asia, Asia, Asia. From morning shows to financial shows, the buzz phrase has been the “Asian crisis.” This event has been the cause of every notable effect in the last six months. President Clinton takes a trip to China, and human rights issues take a back seat to the Asian crisis. High-tech stocks take a roller coaster ride -Asia. The summer stock rally is slow to materialize – Asia. The Federal Reserve Board leaves interest rates unchanged- Asia. I`m waiting to see a report on The Weather Channel blaming the deadly heat on the Asian crisis.
Investing involves risk, and overseas investing involves additional risks. The two most common are political risk and currency risk.
Political risk exists when governments are unstable. In the U.S., a new President means new fodder for the late night talk show hosts. The changes that come with a new administration are minor, as far as the American public is concerned. Our government has a system of checks and balances which give us stability. And stability translates to lower financial risk when it comes to investing in that market.
The Asian arena has been plagued by political instability. These are countries with ancient histories but infant government structures. Indonesia has been run by a family that has enjoyed privilege and position but never understood the principles of good management. And Indonesia has seen rioting. As a result of this chaos, its financial markets have fallen drastically. How can you run a business when there are troops in the streets?
The other big risk is currency risk. The financial center of Asia is Japan. Japan is the one financial market that has been around long enough to be considered mature. Japan`s banks have fueled the tremendous growth in Asia by supplying money to develop business. Their loans to other Asian countries have been the grease to this economic wheel. And, for over a decade, Japan`s own growth has been good. For over a decade, their economy has boomed. But now, they are in recession. It seems they were due for one, and maybe there is a lesson there for our own markets.
When Japan started to slide into recession, the value of the yen (their currency) slid, as well. They were importing fewer goods for the same money now. Their economy slowed. Some of their loans at home started to default. Japanese banks found themselves on shaky ground. The only alternative was to cut off some of the money going to their foreign brothers. The fuel for further Asian growth was gone. It was like a domino effect.
Currency risk exists even without recessions overseas, though. Anytime you invest in an overseas stock, you have to exchange dollars into another currency. To get your money out, you have to change back into dollars. How much of that other money your dollar will buy and vice versa depends on the changing currency markets. They say that now is a good time to take a trip to Indonesia. American dollars are worth much more there now, making travel cheap. I`m not sure I`m ready to brave the flying bullets, though.
Political risk and currency risk are related. When a government is unstable, the value of the money they`re printing also becomes unstable. And when a country is having economic trouble and their currency is suffering, unrest will likely follow. After all, dissent most often comes on an empty stomach.
No doubt about it. The Asian crisis is real, and it`s not over yet. And this crisis has had an effect on American business and our own financial markets. International companies like Coca-Cola have seen a slowdown. Computer companies that tend to fly high in boom times, like Intel, have suffered. Our concern was so great that our own government intervened to help out these overseas markets.
The Asian crisis has put a damper on our own growth. And there lies the silver lining. The slowdown meant lower inflation. And lower inflation meant no action by the Federal Reserve Board on interest rates. And continued low interest rates mean continued growth for our own financial markets.
Ohhh…I feel that headache coming back. I`m going to lie down now and wait for this Asian crisis to pass. Wake me when it`s all over. Just remember – no pain, no gain.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is NL2invest@aol.com.
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