Fool.com: Asia Making a Turn? (Fool Plate Special) August 20, 1999

FOOL PLATE SPECIAL
An Investment Opinion

Asia Making a Turn?

By Matt Richey (TMF Verve)
August 20, 1999

Evidence continues to roll in that Asian economies are rebounding. Last week, Cisco Systems CEO John Chambers made positive comments regarding the company's success in Asia, citing the region's 60% year-over-year bookings growth. Today, word came that three Japanese banks will be forming the world's largest banking group with assets of $1.3 trillion.

In what's being described as a "broad alliance," the three banks would effectively merge over the next two years. If successful, the combination would allow branch consolidation and reduced payrolls. Along with these cutbacks, the banks would also be able to spread their systems costs over a larger base of revenues, and thereby enhance profitability.

Over the course of the past several years, part of Japan's problem in getting its economy back on solid ground has been its unwillingness to make necessary reforms in its financial system. But staring financial collapse square in the face for most of last year caused Japan finally to begin taking some bold steps.

According to the The Wall Street Journal this morning, the Japanese government has provided the country's banks with necessary capital and reduced interest rates to almost zero in order to spur business investment and consumer spending. In addition, the Japanese regulators are reportedly cracking down on the country's numerous weak banks, and thereby allowing the larger, healthier banks to boost profitability by operating in a less competitive environment.

These reforms are beginning to yield signs of improvement. The Japanese yen has been appreciating strongly of late as capital flows into the country. In other words, the Japanese economy's investment potential is so strong that investors around the world are pumping money into the country. (In fact, some of that money is flowing out of the U.S. as can be seen by the weakening dollar.) Part of what's attracting this flow of capital is Japan's strong 8.1% annualized gross domestic product (GDP) growth in the first quarter.

Other Asian countries are showing signs of prosperity, as well. Yesterday, MasterCard reported its Asian consumer confidence survey, which showed sharply higher consumer optimism in Singapore, Indonesia, and Malaysia. "Recovery has been quicker than expected and not as difficult as predicted and this has seemingly helped invigorate consumer confidence," said a MasterCard official. South Korea is also reporting strong growth with second quarter GDP coming in at a higher-than-expected 9.8% annual rate. The only weak spot in the region is China, which although showing signs of improvement, is still constrained by heavy-handed government policies. If China ever adopts free market policies in combination with a trustworthy rule of law, then the whole region -- and world, in fact -- could experience unprecedented economic growth and prosperity.

So, the question for Foolish investors is, "What's the best way to take advantage of the growth in Asian economies?" Individual U.S. investors face difficult information disadvantages when investing overseas. Foreign companies don't abide by our country's strict accounting and financial reporting rules. Further, as U.S. consumers, we don't have a good frame of reference for evaluating many foreign companies on a firsthand basis. To avoid these risks, the best solution seems to be an index fund. Vanguard's Pacific Stock Index Fund offers a no-load and low expense ratio solution to diverse exposure to a broad array of Asian companies. For concentration within Japan, the T. Rowe Price Japan Fund is another low-fee fund with a good track record.

Foolish investors may be a bit startled to see any mutual funds presented in this space, but because of the risks involved, a low-expense fund offers the best way to take advantage of the the rapidly expanding economies of Asia.