Asia's Tigers Declawed, for Now

The "tiger" economies of East Asia, after years of outstanding returns, have lately sprung upon investors in one of the broadest market maulings of the decade.

The emerging Asian economies have long been a favorite of mutual fund investors, providing both diversity and aggressive growth.

But in recent years, and especially in recent weeks, the performance has been uneven. The Hong Kong, China, and Taiwan markets have chalked up solid gains this year, but other markets have lagged.

And a recent wave of attacks on regional currencies have even cast doubt on markets in China and Hong Kong. Investors looking for the punch provided by emerging markets may want to look in a different hemisphere.

"The region's markets will probably bump along the bottom for a while. So the question is, when will we see the upside?" says Leila Heckman, director of global asset allocation at Smith Barney.

A mix of economic mismanagement and speculation has brought down regional currencies and markets in recent weeks. Stock markets in the Philippines, Singapore, Malaysia, and Thailand show declines this year, in dollar terms, in excess of 20 percent.

The question among investment experts is whether the troubles are cyclical or proof that these economies will slow as they mature.

Even optimists concede serious obstacles: corruption, chronically bad lending, excessive regulation, and other structural problems. But there is also a consensus that the region's strengths - high savings and education, commitment to trade, comparatively low taxes - will return at least some of the tigers' roar.

"In general the Southeast Asian markets have a lot of strength, whatever their current problems, and in the long term those strengths will win out," says Bill Rocco, an international analyst at Morningstar.

The region's currencies and markets have plummeted since July 2, when the Thai government, reacting to months of economic turmoil, devalued its currency (the baht) and stirred up a speculative storm across the region. The baht has plunged 25 percent against the dollar.

To contain the repercussions, the International Monetary Fund and several Asian countries assembled a $16 billion bailout for Thailand.

Currencies have also cratered in neighboring countries, and, after some resistance, the region's governments have floated their currencies instead of pegging them to the dollar.

Long term, that could help. "With flexible currencies the countries have much more control over their economies," says Rob Subbaraman, an economist at Lehman Brothers in Hong Kong.

The turmoil has shaken the tigers' standing as the paragons of rapid growth and investor promise. Most regional economies exceeded an average 8 percent growth for most of the past 20 years.

In the past decade, China, Indonesia, Malaysia, the Philippines, and Thailand have also logged stunning rates of growth.

But East Asia has lost some of its drive. Export growth rose just 5 percent last year, about one quarter of the rate in 1994 and 1995. Average economic growth across the region slipped from 9 percent in 1995 to 7 percent in 1996.

Optimists say the challenges will pass, especially with a recovery in semiconductors, a key industry just ending a two-year slump.

Until these gusts - and the typhoon of speculation - pass, investors can get a piece of Southeast Asia with a measure of stability through diversification. They should invest in Pacific region funds with strength in the more promising markets of Hong Kong, China, and Japan, say investment analysts. That gives a hedge against a continued downturn in Asia but a foothold in an early rebound.

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