“Dear David, Ambrose Evans-Pritchard has an excellent piece in today’s Daily Telegraph on foreign debt rising in emerging Asia from 300bn to 2.5 trillion dollars over the last ten years. His views make worrying reading for those, such as myself, holding long term equities and bonds in the region and I would be grateful for your comments.”

David Fuller's view

Here is Ambrose Evans-Pritchard’s article: Morgan Stanley warns on Asian debt shock as dollar soars. 

Many thanks for your interesting point and the mention of this article.

There are certainly risks when interest rates rise because not all borrowers will have been prudent, as we see in every global monetary cycle.  The mere risk of debt problems, quite apart from the reality, can roil markets as international investors withdraw capital. 

I am hopeful that the problem will be far less severe than the Asian financial crisis in the late 1990s, because leaders learned a hard lesson at that time.  Governments should be wiser and the ASEAN economies are more robust today, despite 2008’s financial crisis problems. 

However, the reality is that no one knows exactly how this will play out, although some financial turbulence is all but inevitable as interest rates move back to more normal levels.  It would be prudent to expect at least a number of medium-term cyclical bear markets of 20 to 30 percent, and probably more where governance has been poor. 

It is not easy to know which will be most vulnerable in advance.  However, the Philippines, Indonesia, Malaysia and Thailand were among the most vulnerable in the late 1990s.  Interestingly, all but Malaysia ran too far ahead and experienced medium-term cyclical bear markets last year.  Will that reduce the gathering risk?  Possibly, but I do not know.  However, for any of the emerging Asian markets where you have investments, I would pay close attention to the 200-day MAs.  When they are broken by more than a whisker and the MAs begin to turn downwards, I would adopt a more defensive posture, particularly if rising interest rates are a contributing factor.