Author Topic: Is another Asian financial crisis developing?  (Read 2678 times)

ajc

  • Sr. Member
  • ****
  • Posts: 464
Is another Asian financial crisis developing?
« on: August 10, 2018, 07:25:45 AM »

With the weakening of the Chinese yuan, the Turkish lira crisis, and now the Vietnamese currency getting impacted (https://www.bloomberg.com/view/articles/2018-08-09/vietnamese-dong-feels-the-ripples-of-china-s-yuan-rout), I'm wondering what the chances are of another 1997 Asian Financial Crisis or 1998 Russian one?
I mean, it's been a while since a major global economic crisis came out of an emerging region.

Anyway, if anyone's an expert, was around for past versions, or has some smart ideas, it'd be good to hear how they think a crisis could effect businesses or sectors in emerging/developed markets.

I'm guessing commodity prices would mostly fall because a bunch of economies import fewer raw materials while in recession.
They'd also likely buy fewer luxury goods.
In developed markets, I'm thinking lower commodity prices could result in an economic boost because input prices are lower.

Interested to hear how others handicap the probability of another large emerging market crisis happening, as well as how they think about it investment-wise.
Also, it should go without saying this thread is for investment ideas or your jokes about the hit the Vietnamese dong has taken.
Best save your political discussions for the appropriate section.



Viking

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1363
Re: Is another Asian financial crisis developing?
« Reply #1 on: August 10, 2018, 10:11:00 AM »
Ajc, my current strategy is pretty simple. I am now getting more cautious with my overall portfolio. I am holding larger cash positions (selling on strength like we have seen the past month or so). This will allow me to take advantage of sell offs when they happen.

For the past 5 years i have been pretty much fully invested most of the time. No more.

I expect at some point in the not too distant future (the next year or two) i will get quite cautious and likely move my portfolio mostly to cash. I am watching the economic data out of the US closely for when it starts to turn down. Looks good right now but storm clouds might be forming. I will be happy to earn a little less while i sit amd wait for the next big down draft in stocks :-)

DocSnowball

  • Full Member
  • ***
  • Posts: 210
Re: Is another Asian financial crisis developing?
« Reply #2 on: August 10, 2018, 10:18:29 AM »
Only curiosity and have been wondering the same, no competence to answer. This is a nice timeline from PBS of the prior crisis if it helps you to study it.

https://www.pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html

I find most Em Markets still overvalued on a PE basis with all these clouds looming, so waiting.

alwaysinvert

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 821
    • värdeinvesteraren
Re: Is another Asian financial crisis developing?
« Reply #3 on: August 10, 2018, 12:14:09 PM »
Ajc, my current strategy is pretty simple. I am now getting more cautious with my overall portfolio. I am holding larger cash positions (selling on strength like we have seen the past month or so). This will allow me to take advantage of sell offs when they happen.

For the past 5 years i have been pretty much fully invested most of the time. No more.

I expect at some point in the not too distant future (the next year or two) i will get quite cautious and likely move my portfolio mostly to cash. I am watching the economic data out of the US closely for when it starts to turn down. Looks good right now but storm clouds might be forming. I will be happy to earn a little less while i sit amd wait for the next big down draft in stocks :-)

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-returns-in-2016/msg285229/#msg285229
http://www.cornerofberkshireandfairfax.ca/forum/strategies/what-do-folks-think-or-do-while-markets-are-at-highs/msg325599/#msg325599
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/your-current-cash-weighting/msg23739/#msg23739
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/all-the-negative-news/msg24148/#msg24148
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/big-warning-sign/msg22442/#msg22442
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/top-picks-for-the-new-year/msg13668/#msg13668


For someone that's been fully invested for 5 years you seem to post often about holding lots of cash and being worried about the macro picture. Pretty much all throughout your forum career from what I can see, in fact.

rb

  • Hero Member
  • *****
  • Posts: 2775
Re: Is another Asian financial crisis developing?
« Reply #4 on: August 10, 2018, 12:26:23 PM »
The 98 russian crisis was different animal than the 97 Asian crisis. So I'll leave that one alone.

In the 97 Asian crisis the currency drops made big headlines but the crisis didn't happen because of the currency drops. The currency drops were more like a symptom of the disease rather than the origin. The crisis itself was pretty textbook. An investment bubble inflated with massive foreign investment and leverage. On top of that you've had a banking crisis due to under-capitalized banks making bad loans. I'd say a good recent comp would be Spain circa GFC.

Once the bubble popped everything was made worse by boneheaded austerity policies pushed on by the IMF and massive capital flight out of the countries.

Today we don't really have the ingredients for such a crisis in the EMs. The only thing that comes close would be China where there's a lot of leverage and you don't really know how good the banks are. But China has capital controls and massive firepower to stabilize its economy. On top of all that it doesn't have to deal with things like nonsense politics and the US Congress. So it can move quickly and decisively.

Now I'm not saying that you can't have a problem in China. But if you do it'll look very deferentially than the 97 crisis.

LounginMKL

  • Newbie
  • *
  • Posts: 39
Re: Is another Asian financial crisis developing?
« Reply #5 on: August 10, 2018, 12:54:41 PM »
Quote
For someone that's been fully invested for 5 years you seem to post often about holding lots of cash and being worried about the macro picture. Pretty much all throughout your forum career from what I can see, in fact.

Dang, savage!  :o

ajc

  • Sr. Member
  • ****
  • Posts: 464
Re: Is another Asian financial crisis developing?
« Reply #6 on: August 10, 2018, 01:44:12 PM »


In the 97 Asian crisis the currency drops made big headlines but the crisis didn't happen because of the currency drops. The currency drops were more like a symptom of the disease rather than the origin. The crisis itself was pretty textbook. An investment bubble inflated with massive foreign investment and leverage. On top of that you've had a banking crisis due to under-capitalized banks making bad loans. I'd say a good recent comp would be Spain circa GFC.



That's fair. I'd add though that a number of the analysts featured in Bloomberg and Reuters today were saying if the emerging markets narrative gets broken, a ton of capital will flow out. As you'd expect.

From the opinion piece above:
"State Bank of Vietnam may be forced to yield. In just one week in July, it sold more than $2 billion to banks to meet demand for the dollar, the Saigon Times reported. It’s unclear how much the central bank has shelled out since to prop up the dong. At this rate, it will quickly erode the $12 billion of foreign reserves painstakingly built up last year."

So I'm wondering if the question isn't whether China can steady itself, because as you mentioned there are reasons to think it can, but if China sneezes do large parts of emerging Asia and elsewhere go on to catch one hell of a cold.
As with DocSnowball, this is a curiosity to me more than anything else, but if I remember what I've read previously about 1997, once the foreign reserves of various ASEAN countries were used up is when the real fun began.

I guess that's perhaps starting to happen across a few places, so I'm wondering which countries and sectors are the most at risk.
Unfortunately this isn't my area, so who gets impacted the most by yuan depreciation or dollar appreciation as things stand, isn't yet obvious.

 

TwoCitiesCapital

  • Hero Member
  • *****
  • Posts: 2032
Re: Is another Asian financial crisis developing?
« Reply #7 on: August 10, 2018, 02:20:29 PM »
I'm no expert on the crisis, but I'd also add that in the last EM "crisis" that we saw, 2015/2016, countries were less inclined to use reserves and allowed currencies to free-float and used policy tools like interest rates to address inflation.

Having free floating currencies and using policy tools like interest rates seem like it opens up the number of possible "positive" outcomes that avoids a crisis.

Free floating currencies are counter cyclical. Sure it makes dollar denominated debt of some companies/governments harder to repay, but it also makes export based companies more competitive on price and many EM economies are exports based. The net-effect, inclusive of second and third order consequences is hard to predict, but I'm generally in the camp that EM is better positioned to handle this kind of crisis now and free floating currencies ease a lot of the pressures encountered by trying to defend fixed exchange pegs.

SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2918
Re: Is another Asian financial crisis developing?
« Reply #8 on: August 10, 2018, 02:31:58 PM »
Every crisis is different, but the kicker here is the degree that China subsequently pulls back from trade with the west. It's not just disruption and a return back to the 'norm', it's also the 'norm' resetting to some other level. 

Our own thoughts are ultimately more trade between neighbouring asian nations, and less trade with the 'west; the same way that US trade is primarily between just Canada and Mexico. We anticipate a lot of recycling (steel, batteries, computers, etc); but timing, degree, & liklihood is anyone's guess.

We aren't doing anything specific other than raising the quality of our investments, & continually recovering our cash outlays as opportunity presents. T-Bills and house money (in O/G, Iron, Crypto) give us lots of flexibility accross both time & economic cycle. All we need do is wait for the newspaper article telling us XYZ is collapsing (GE?), & deploy accordingly.

SD
 
« Last Edit: August 10, 2018, 02:34:07 PM by SharperDingaan »

rb

  • Hero Member
  • *****
  • Posts: 2775
Re: Is another Asian financial crisis developing?
« Reply #9 on: August 10, 2018, 02:45:17 PM »


In the 97 Asian crisis the currency drops made big headlines but the crisis didn't happen because of the currency drops. The currency drops were more like a symptom of the disease rather than the origin. The crisis itself was pretty textbook. An investment bubble inflated with massive foreign investment and leverage. On top of that you've had a banking crisis due to under-capitalized banks making bad loans. I'd say a good recent comp would be Spain circa GFC.



That's fair. I'd add though that a number of the analysts featured in Bloomberg and Reuters today were saying if the emerging markets narrative gets broken, a ton of capital will flow out. As you'd expect.

From the opinion piece above:
"State Bank of Vietnam may be forced to yield. In just one week in July, it sold more than $2 billion to banks to meet demand for the dollar, the Saigon Times reported. It’s unclear how much the central bank has shelled out since to prop up the dong. At this rate, it will quickly erode the $12 billion of foreign reserves painstakingly built up last year."

So I'm wondering if the question isn't whether China can steady itself, because as you mentioned there are reasons to think it can, but if China sneezes do large parts of emerging Asia and elsewhere go on to catch one hell of a cold.
As with DocSnowball, this is a curiosity to me more than anything else, but if I remember what I've read previously about 1997, once the foreign reserves of various ASEAN countries were used up is when the real fun began.

I guess that's perhaps starting to happen across a few places, so I'm wondering which countries and sectors are the most at risk.
Unfortunately this isn't my area, so who gets impacted the most by yuan depreciation or dollar appreciation as things stand, isn't yet obvious.
In 97 a lot of Asian countries had their currencies pegged to the dollar and no capital controls. They've exhausted their foreign reserves by foolishly trying to defend their pegs. Right now things are different. The currencies are mostly free flowing and with the exceptions of a few basket cases (looking at you Indonesia) the economies are more robust. Their financial systems look alright as well.

In the case of Vietnam. It has capital controls in place. If they choose to really enforce them then they probably won't be doing the dong any favours but it'll stabilize things.

I don't think there's much to worry about the yuan loosing some ground. This is what you'd expect the currency to do given this whole tariffs business we have going on. Not some great calamity.

I also think it's fair to assume that if China sneezes the ASEAN will catch a cold. But based on how things stand that cold will look more like a regular recession would look rather than a crisis, contagion, or any of the scary words.