First, Asia has changed greatly over the past decade. The biggest changes have taken place in Southeast Asia, which boomed in the early '90s and then collapsed with the financial crisis of 1997 and 1998. Economies tanked and investors fled. And while some economies have shown signs of recovery, few foreign investors have taken heed. The benchmark stock index in Thailand, for instance, is still stuck in the 300 range. At its peak during the boom days, it topped 1400. Over the past two years, the Philippines, Indonesia, and Malaysia have also failed to catch fire despite signs of economic life.
Now that the U.S. is slowing down, as a Southeast Asia booster might argue, that stands to change. Sure, with interest rates falling and the Nasdaq floundering, investors may be looking for alternatives. And the emerging markets of Southeast Asia have been down so long, they're certainly ready for a turnaround. But those markets aren't generating much interest. Countries like the Philippines, Indonesia, Thailand, and Malaysia were so hammered by the Asian crisis that most investors have simply fled and aren't likely to return soon, regardless of what happens in the U.S.
BOUNCE OR TROUNCE? "People aren't interested in those markets," says Tim Condon, an economist with ING Barings in Hong Kong. Condon lays out two scenarios. In the rosy one, the U.S. avoids a nasty recession and instead bounces back in the second half of this year. That's the "V-shaped" recovery the optimists are predicting. The gloomy scenario has the U.S. falling into a more serious and prolonged slump.
Under the rosy scenario, the Asian markets that stand to gain the most are not in Southeast Asia but instead in Northeast Asia. Take South Korea and Taiwan. With their tech-heavy industries -- like semiconductors and computer peripherals -- those countries have suffered from the tech slowdown in the U.S. But they would likewise win if the tech sector leaps ahead during a recovery.
The Taiwanese market has especially suffered in the past few months because of Nasdaq's fall as well as the impact of local issues: President Chen Shui-bian has been squabbling with opposition legislators about a controversial nuclear power plant. That has led to calls for Chen's impeachment and has spooked investors. However, Chen says he's willing to compromise, which should take some of the pressure off Taiwanese shares going forward.
A HOST OF VARIABLES. With the exception of Singapore, Southeast Asia does not have a significant electronics sector to benefit from that kind of U.S. rebound. There are a handful of companies, of course, such as Hana in Thailand and Music in the Philippines. But Southeast Asia's stock markets remain dominated by the Old Economy companies, the ones that boomed in the years leading up to the 1997 crash and have floundered ever since.
Suppose America doesn't get a V-shaped recovery. Shouldn't the lack of a well-developed tech sector help these countries withstand the impact of a bear market driven by the collapse of technology shares? Not really. Asia still has its share of markets plagued by weak companies operating in a climate of political uncertainty -- the daily carnage in Indonesia, an ousted President in the Philippines insisting that he's still President, a new populist premier in Thailand, and an aging leader in Malaysia.
The other obstacle for Southeast Asia remains its giant neighbor to the north, China. Certainly, the world's last Communist power has its own share of political question marks. But that's not deterring investors, especially with the prospect of China's entry into the World Trade Organization leading to even greater interest in the Middle Kingdom's gigantic market.
JAPAN'S ROLE. Hong Kong also looks like a better bet. With its dollar pegged to the greenback, the Territories should make it through a U.S. downturn. That's because, thanks to Hong Kong's currency-board system, as interest rates in the U.S. fall, they fall in Hong Kong as well. And that's good news for the property and financial sector, which still dominate the Hang Seng index. The property market in Hong Kong has been in the dumps since the onset of the Asian crisis, and pressure is growing in the legislature for the government to step in and prop up prices. That could further help sentiment toward the sector.
One wild card is Japan. "If the Japanese economy can pick up the pace of growth," says Mark Konyn, a director at Dresdner RCM in Hong Kong, "we will start to see the region improve and delink from the U.S." If Japanese confidence returns, then sentiment across Asia should improve -- regardless of what happens in the U.S., Konyn adds. But if Japan can't find growth? "It's difficult to see Asia unbundling from the U.S.," he says. All in all, a mixed recipe for investor confidence across the Pacific. Einhorn covers technology for BusinessWeek from Hong Kong. Follow his column every week, only on BW Online