Southeast Asia.

I love SE Asia, especially Thailand. Vicki and I lived most of last year in Chiang Mai, in northern Thailand. We've spent wonderful months in Laos and Singapore, Malaysia and Indonesia. I'd love to tell you the region has hit bottom, that necessary changes are in place, that economic recovery is on the way. I'd love to tell you this, and maybe some day I will.

But not in 2002.

Look to Japan
The U.S. powers the world economy, but in SE Asia Japan does much of the driving. Unfortunately, Japan has lost its way. In 1989 Japan's Nikkei stock market index fell from 40,000 to 15,000. Now, thirteen years later, it's stalled at around 10,000. Years of fiscal and monetary stimulus have failed to revive either the stock market or the economy. Japanese consumers stick more and more money in mattresses, terrified of what might happen to it otherwise.

The curious thing about Japan's problem is that everyone, from Prime Minister Koizumi to European socialists to American economists and bureaucrats--even including Treasury Secretary Paul O'Neill--everyone knows what the solution is. Japan has to make deep structural and institutional reforms, especially in banking and agriculture. Period. There's no other way. Write off bad loans, throw away obsolete inventory, open the rice market.

Yet PM Koizumi refuses to act. I suspect Koizumi fears for his life--not his political life, but his real life, the kind that ends in a coffin--if he makes meaningful reforms. After all, he knows what's needed. He enjoys enormous popularity and unprecedented political power. Crown Princess Masako even helped out with a royal baby girl in late 2001, improving the public mood. Still, Koizumi does nothing.

I may be stretching here, but think of the parallel with Mexico. In 1994 Mexican old-line party bosses--the so-called dinosaurs--gunned down reformist PRI candidate Luis Donaldo Colossio, who had the courage to challenge sixty-seven years of party hegemony. Koizumi's LDP has run Japan for nearly that long, and LDP dinosaurs have much to lose in reform. I'm sure those LDP dinosaurs have made their views clear to PM Koizumi.

If I'm wrong on this--that is, if Koizumi takes action in 2002--you'll have plenty of time to return to Asian stock markets. Figure an open window of at least a year or two, whether you make the Japan play directly or through secondary markets in SE Asia. But until you see decisive action, rather than hopeful words and flowery speeches, keep your checkbook in your pocket.

Consider Thailand first
A tropical climate, kind and friendly people, wonderful spicy food, good roads and airports, sunny beaches, and a cheap baht make Thailand a top tourist destination. I've been there six or seven times, staying longer each time; on the last trip beginning in 2000 Vicki and I stayed almost a year.

If you want to go, EVA Airways out of Taiwan offers a unique Deluxe Coach service from both Europe and west-coast U.S. cities to Bangkok. This EVA Deluxe Coach approaches Business Class but at coach prices, making it one of the world's best airfare deals.

At one time Thailand's stock market was as exciting as the country's tourist sites. These days, though, the Thai stock market is not so much down, although it certainly is that, but largely forgotten. Thailand's entire stock market cap totals only $33 billion, less than one good-sized company in the U.S., an Amgen, say, or a Qualcomm. The median market cap of the S&P 500 is about $65 billion, or double that of Thailand's entire stock market. Low daily volumes, low market caps, little IPO action: international investors are looking elsewhere. Thailand's SET index reminds me of the gold price. Neither one ever moves, ever excites, ever confirms a trend. And anyway, no one cares.

If Thai companies return to profitability, and begin to invest, export, grow, and put money in the bank, will anyone notice? Not likely. And Thai companies give little indication they're about to do any of these things.

Still, if I were a gambler (and I'm not), and had to make one bet in SE Asia, (which I don't), I'd choose Thailand, especially if the Japanese return to invest there. Thais have a can-do, let's-get-on-with-it attitude, and suffer little of the ethnic, racial, and religious strife that plagues so many countries in the region.

Investors might also consider a real estate play in Thailand. By law only Thais can own real property, but foreigners can and do buy condos, normally in Bangkok or Chiang Mai. For $80,000 you can buy a beautiful, view apartment in exciting Bangkok. Seductive. But here's a warning: A real estate man told me that new condos tend to depreciate, like new cars, instead of appreciate, like land. He recommends buying cheaper, pre-owned units in stable, luxury buildings, units that have been well maintained, with furniture and fixtures, cable and phone, curtains and plumbing. If you have the patience to look around, and know how to do a careful inspection, a Bangkok or Chiang Mai condo might be fun. At these low prices you have little to lose.

Forget Malaysia and Indonesia
Malaysia and Indonesia share a common language, Bahasa, and a common religion, Islam. When Vicki and I first visited Malaysia 14 years ago, we hung around the beach on Malaysia's northeastern coast near Khota Bahru. Malaysia's northeast was, and is, more rural, more conservative, more Moslem, and more isolated than the rest of the country. I remember one day, Vicki and I were in the water and saw a group of small Malay children come to play. The little boys tore off their clothes, ran into the water, and started tossing a ball around. The naked boys laughed, screamed, ran, and jumped. The little girls, though, stayed wrapped in their religious garments, covered from head to toe, in the choking heat and humidity. They sat on a fallen coconut log, their hands in their laps. Only their eyes betrayed how much they'd like to play in the water, too.

Today Malaysia's Moslems let others pilot planes into the World Trade Center, but in their own country they enjoy vastly more political power. Lonely Planet reports that, forget the little girls, these days even foreigners are prohibited from bathing on those northeastern beaches. Malays are successfully turning back the clock in other ways, too, in a desperate attempt to shut out what they consider to be pernicious foreign influences. Malaysia has exploded in race riots against ethnic Chinese, tightened racist laws favoring Malays, and strictly regulated foreign stock and currency ownership. In a bizarre disconnect Malaysia's tourist literature plays up the country's former diverse, cosmopolitan feel. Don't you believe it. Malaysia is an officially racist country moving rapidly backwards, closing in on itself. Look no farther than Kuala Lumpur's spanking new airport, built for the 21st century, but with no one in it. In the past few years Malaysians have made their country more and more uncomfortable for tourists and investors alike.

Frustrated Prime Minister Mahathir Mohammad has lashed out at foreign investors, currency traders, high tech, and George Soros. In one speech Mahathir called for a worldwide monetary authority. Think about this. Kofi Annan, say, or Fidel Castro or, why not, Mahathir himself would dictate monetary policy to Alan Greenspan and Wim Duisenberg, presumably with a view to protecting Malaysia's ringgit and other thinly traded currencies. Silly, but populist Mahathir has lots of silly ideas, including his blame-the-victim contribution after the September 11 attacks. Don't even think about investing in Malaysia until Mahathir is gone (he's 76, and been in charge for twenty years) and the new leader shows his stripes.

Indonesia shares many of Malaysia's problems, including rising Islamic fundamentalism and riots against ethnic Chinese. Years ago I was an audit partner in one of the Big Eight (now Big Five) public accounting firms. At our partners' meetings around the world I'd wind up in the bar with the more senior partners, big guys who handled big clients in big offices. These old-timers had been auditing multinational companies since I was in grade school, crisscrossing the globe year after year.

We'd chat about countries we'd seen up close. Which were the worst bureaucracies? Which had the biggest liars? Which places were the hardest/easiest to break into? The most fun, the easiest to deal with? The most corrupt? On this last, corruption, I'd been working in Latin America. I suggested Mexico, perhaps, or Peru. The old-timers laughed patiently at my lack of experience. Mexican corruption was small time. For really big time corruption, outside of Africa, which rarely counted anyway, you'd have to go with Indonesia.

Flash forward to 2002. The man behind that infamous corruption, General Suharto, is out of the picture, the currency destroyed, the economy in shambles. Indonesia has stabilized a bit, in the past year or so, but it's still premature to think about putting any money over there. And with increasing tensions I'd hesitate to spend much time traveling there.

Wait on the rest
The region's communist countries--Burma, Laos, Cambodia, and Vietnam--profess to want to open markets and permit private enterprise. Vietnam even fooled Time magazine into believing this. These commie governments approve some projects, now and then, but the process is slow and uncertain. As time goes by the commies appear more reluctant, not less. I suppose someone may make money in these countries, but not you or me. Give these places a pass for now.

If you travel to the region, consider a visit to Luang Prabang, Laos's ancient capital. L.P. has the feel of a 19th-century colonial outpost, right out of Kipling, Conrad, or Somerset Maugham. L.P. has four French restaurants, and you should try them all. Don't forget to drink some French wine with your meals, imported without tax or duty--the locals don't drink the stuff.

Finally, Singapore and Hong Kong enjoy good-volume, developed stock markets. In theory investors should diversify into these markets, instead of putting all eggs in New York or London. New York goes down, Hong Kong goes up, you knock the extremes off your portfolio returns. But American capital and New York markets so dominate that, inevitably, New York goes down, Hong Kong goes down. Only Japan has its own drummer, and we've already talked about Japan.

So by all means put a few bucks in the Singapore and Hong Kong markets if you feel like it. These markets will likely do as well as any. But you'll probably have only limited success in reducing overall portfolio risk. And while these markets should do well if New York does well, it's hard to conclude they'll outperform.

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