The West Also Rises

LONDON: American and European capitalism is euphoric nowadays. By contrast, Asia's capitalists are glum. In 1996, New York's stock market broke all records, rising to greater heights since. The same in London, Frankfurt, Zurich and Paris. But in Tokyo, Taipei, Bangkok and Seoul, stock markets are gloomy. Japanese shares are worth half their 1990 prices. Even in Hong Kong, where shares recently hit new highs, they are only 10% above the peak of early 1994. In the same three year period, prices in Wall Street and Europe skyrocketed by 60% or more.

This picture bears no relation to what we hear in political speeches or read in business newspapers. Politicians warn of the challenge posed by Asia's "tiger economies". Investment experts urge us to put our savings in "emerging markets", since these are certain to grow three times more strongly than the sclerotic, over-regulated economies of Europe and America for decades. But stock markets love nothing more than frustrating politicians and making pundits look foolish.

Market professionals have been betting since early 1995 that share prices in America and Europe would collapse, while Asia would begin another bull market run. Instead, Wall Street and European stock markets have bounced back after every setback and continue their stratospheric rise. Asian markets, meanwhile, have gone nowhere but down.

Part of this can be explained by misunderstandings about the relationship between stock market prices and economic growth. A strange conventional wisdom developed in the inflationary 1970s and 1980s: that strong economic growth and falling unemployment was bad for share prices. Prosperity, it was felt, would incite inflation, provoke high interest rates, triggering a stock market rout. While experts spent the last two years propounding this thesis the market quietly restored an older, more common-sense rule: prosperity is good for profits and therefore good for shares. Here is one message from the markets worth pondering, even for non-investors: political confidence may be at a low ebb in Europe; businesses and consumers may be shell-shocked by the last recession and gloomy about the future; but judging by the market's behavior the years ahead are more likely to resemble the stable and prosperous 1950s and 1960s than the crisis-ridden decades from 1973 to 1989.