Heard in Asia: If History Is a Guide, Air Strikes May Be Bullish for Asian Stocks
October 9, 2001
By JASON BOOTH
Staff Reporter of THE WALL STREET JOURNAL
Are the U.S. and British air strikes bullish for Asian stocks markets?
The ongoing attacks on Afghanistan may be sending investors scurrying to the sidelines, as stock markets tumbled regionwide on Monday, a day after the strikes began. Yet a look back at the history of Asian stock markets suggest that when the violence mounts, it's probably time to buy. It's a macabre insight, but one that's often held true.
That was the case in early 1991, when the U.S.-led coalition began its assault on Iraqi forces occupying Kuwait. Asian markets had drifted lower in the six months following Iraq's invasion of the oil-rich kingdom. Yet as soon as U.S.-led forces launched an offensive, Asian markets started a rally that didn't run out of steam until the summer of 1997, at the brink of the financial crisis.
A similar pattern was seen in 1989, when Chinese troops crushed the pro-democracy movement centered in Beijing's Tiananmen Square. Hong Kong's Hang Seng Index plunged 37% between mid May, when martial law was declared in the face of mounting protests, and June 4, when the military opened fire on demonstrators. Yet after June 6, after the protests were broken with substantial loss of life, the market quickly staged a rebound that didn't stop until Iraq invaded Kuwait.
Even in Pakistan, the country that is closest to the fighting this time around, it was violence -- a military coup in October 1999 -- that sparked a 70% rally in the Karachi stock market over the next six months as the new military regime was seen as a stabilizing force.
Will Asian stock markets repeat history today? Most analysts and fund managers believe the recent military action marks the start of a similar rebound, although the timing could be delayed until the success of the U.S. and British air strikes can be determined.
"The action is a step in the right direction," says Aaron Pong, director at RBC Investment Management in Hong Kong. "If the U.S. achieve some kind of victory, the markets will like it."
He argues that by going after the Taliban, as well as the terrorist networks, the U.S. has given itself a more definable target. So once the Taliban have been disrupted or overthrown, it should be enough to satisfy investors. "Assuming there is no major retaliation from the terrorists, I think the markets will be able to move on."
Not everyone is convinced that history -- especially the analogy with the Gulf War, which ended after 100 hours of hostilities -- will set a pattern this time around.
"In 1991 there was a definite objective, a country to overpower. This could drag on indefinitely," says Anand Aithal, a strategist at Goldman Sachs in Hong Kong.
Yet Mr. Aithal does believe that Asian stocks represent a good value, pricing in the probability that Asian companies will only manage 6% growth per year at best over the next decade.
A victory of some sort would allow that value to be recognized, says ING Strategist Markus Rosgen. "Markets do not like uncertainty. Once we have clarity ... there should be few reasons to be bearish on Asia," he said.
In the case of the stock-market valuation, history suggests this may be the bottom. As Mr. Rosgen points out, Asian stocks are near their cheapest level on record, trading at just one time book value. Asia stocks excluding Japan have approached similarly low levels only a handful of times in the last 27 years: the financial crisis of 1998, the Gulf War, the 1982 U.S. recession and the 1974 oil shock. In the years following, Asian stocks rallied dramatically, peaking at between twice and 3.5 times book value, which measures a company's market capitalization compared to its total assets.
Yet for Asian investors, history presents one big unknown, which is how the U.S. stock market reacts to war. Again, the deciding factor will be whether some form of measurable victory comes from the bombing campaign.
That's because the last time the U.S. found itself involved in a drawn-out military conflict, it spelled disaster for equity investors. Late 1965, when U.S. forces first undertook offensive military operations in Vietnam, marked the end of a 15-year stock market rally. Over the next 17 years until 1982, U.S. equities were trapped in a bear market that saw the Dow Jones Industrial Average trade in a range of 600 to 1000.
Write to Jason Booth at jason.booth@awsj.com1
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