Asia markets set own course as they depend less on U.S. (Investments & Finance).

TIME was when many Asian investors came to work in the morning, digested what U.S. markets had done, and did the same. Headlines like "Asia Rallies in Sync With U.S." or "Dow's Plunge Hits Asian Shares" were the norm.

That pattern may be changing. Japan's Nikkei 225 stock average remains a prisoner of U.S. trends, but most bourses outside Asia's largest economy have outperformed the Standard & Poor's 500 index since September. It's the latest reminder that Asian markets are forging their own paths independent of the U.S.

"Non-Japan Asia, after a prolonged period of deleveraging, is now less dependent upon U.S. demand," says Steven Xu, chief Asian economist at SG Securities. As the S&P 500 has fallen nearly 18 percent this year, Thai stocks have risen more than 21 percent. Indonesian equities are up more than 15 percent, while South Korean and Malaysian shares are up about 5 percent and 4.5 percent, respectively.

Thanks to gains in stocks such as Thai Airways International and Thai Farmers Bank, Thailand's is the second best-performing stock market in all of Asia. Pakistan's stock market is up 50 percent. In Indonesia, shares of companies such as PT Ramayana Lestari Sentosa, its largest retailer, and PT Bank Central Asia Tbk have helped Jakarta's market surprise even the optimists.

Locomotive

No one is underestimating the key role the U.S. plays as the international growth locomotive. As the biggest customer of Asian goods, a deep U.S. recession would exact significant pain across the continent. Still, the extent to which non-Japan Asia can decouple itself from the U.S. continues to intrigue and perplex investors.

One explanation is that regional trade among the 10 members of the Association of Southeast Asian Nations and the rest of the region makes it less vulnerable to external economic shocks.

China's evolution is part of the story. Yes, China's economy is smaller than France's, but its growth as a manufacturing powerhouse is altering trade dynamics across Asia.

Another is the region's post-crisis reform. Following the 1997-1998 financial meltdown, the region looked inward to repair its economies and reduce its exposure to the whims of global growth. It also increased efforts to stop relying on a single customer such as the U.S., or at least a small number of them.

Undervalued currencies also are helping Asian stock markets. Not only have they helped Asia's exporters, but also the region's monetary policy makers. At a time when central banks fear that cutting interest rates too much will undermine currencies, lower exchange rates have added stimulus to economies.

All of this is decidedly good news if the U.S. stumbles into the double-dip recession many analysts are predicting. Asia's decoupling from the U.S., if that's indeed what's happening, is a major sign of maturity. Yet the transformation is a work in progress. If Asia's export-dependent economies don't want to be relegated to mere extensions of the U.S. economy, serious retooling is needed.

But efforts over the last four-plus years are beginning to pay off. The first indication of that was Asia's relative stability this year as the world's biggest economy slid and Wall Street plunged. Economies such as China, Indonesia, Malaysia, the Philippines, South Korea and Thailand didn't all boom, but each held up better in the face of a U.S. recession than expected.

The second is the decoupling between non-Japan Asian stock markets and those in the U.S. What's striking is that it comes at a time of global skepticism about corporate governance and transparency. Asia, after all, used to be viewed as a hotbed of dodgy accounting practices. Thanks to events at Enron Corp. and WorldCom Inc., investors seem wary of funneling new money into U.S. shares. Asia is benefiting from that dynamic.

Export Prospects

In fact, some observers think Asia's economies and markets could actually benefit from deeper troubles in the U.S. If lower U.S. stocks continue eating into household wealth, says Andy Xie, Morgan Stanley's chief regional economist, "demand for Asian goods could remain robust, as Americans shift from expensive European luxuries to cheap Asian goods."

While Xie is cautious about the U.S. economic outlook, Asia's export prospects may not be as bad as they seem. That's because the region has learned to use the deflationary trends oozing around the globe to its advantage. "The region's trade recovery has surprised so far," Xie says. "It may last."

Let's hope so. Asia has made considerable progress since its financial crisis, leaving the region with fewer imbalances in most economies today. Most currencies are floating freely, foreign debt has been reduced, banks have been strengthened and transparency improved. Real estate values have come down, while many current accounts are in surplus.

The Philippines stands out as the exception. Manila's growing fiscal problems are spooking investors and sparking fears of a Brazil-like meltdown. Shares of Benpres Holdings Corp., for example, are down 63 percent for the year amid concerns about its debt load. Manila Electric Co., First Philippine Holdings and Philippine Long Distance Telephone Co. also have had a rough year.

Elsewhere in Asia, though, few of the imbalances that left Asia vulnerable to the 1997-1998 crisis exist. That helps explain why many investors have trickled back into the region this year--regardless of what happens in the U.S.

Asian Market Gainers

Thailand SET Index


Aug. 27, 2001  338.57
Aug. 27, 2002  370.14

Note: Table made from line graph
Korea Composite Index


Aug. 27, 2001  578.74
Aug. 27, 2002  724.85

Note: Table made from line graph

Wall Street West columnist Benjamin Mark Cole is off this week