×

Bright prospects for East Asia intact

Torsakarin | iStock / 360 | Getty Images

By the time you read this Monday morning, it is possible that East Asian equity prices will be moving up smartly in sympathy with a sharp rebound of European and American markets.

The reasons behind a partial reversal of what seems to have been a "technical correction" in Europe and in the United States also apply – with a much greater force – to East Asia.

Indeed, the region's economic fundamentals remain very strong – if you choose to ignore (as I do) the nonsense about China's economic collapse, and if you believe (as I do) that Japan will continue to stay more-or-less afloat on the strength of the weak yen, huge liquidity and a very likely temporary step back from further fiscal tightening.

Positive events and large excess savings

The monetary easing in South Korea last Tuesday (October 14) was a positive signal for region's economies, especially since that was unlikely to have been the last interest rate cut. Decelerating inflation, weakening growth dynamics -- a significant slowdown of economic activity in the second quarter, and a continuing decline of industrial production since then – along with an 8 percent currency appreciation against the Japanese yen over the last twelve months leave room for further cuts of the current 2 percent repurchase interest rate.

Read MoreSouth Korea central bank cuts interest rates to boost economy

Another positive signal was a show of increasing political harmony in Indonesia. The country's new President Joko Widodo got last Friday (October 17) a pledge of support and a promise to cooperate from his erstwhile election opponent Prabowo Subianto, a powerful politician whose coalition parties control two-thirds of the parliament.

This is a crucially important development because Mr. Widodo will need strong political help for a large program of reforms and investment plans to improve infrastructure, consolidate public finances and simplify the regulatory environment affecting domestic and inbound foreign direct investments.

Indonesia is already one of the best performing stock markets in East Asia. Since the beginning of the year, the Jakarta Stock Exchange is up nearly 18 percent – partly on expectations that the new government will continue and speed up reforms, and that a relatively well-balanced macroeconomic conditions will be maintained. Last Friday, Indonesian equities soared 1.6 percent, marking by far the largest one-day gain on East Asian bourses.

Apart from these two encouraging signals from the third- and fourth-largest economies in East Asia, investors may also wish to note that – excluding China and Japan – this area currently has nearly $250 billion in excess savings and roughly balanced public sector accounts.

Read More Reform-minded outsider Widodo takes over as Indonesia's president

That means two things.

First, being a net creditor to the rest of the world, East Asia can comfortably handle a widely anticipated interest rate tightening in the United States (whenever that comes) because it needs no borrowing on global capital markets.

Second, these $250 billion in excess savings offer a large pool of funding for portfolio and direct investments throughout the region where relatively fast-growing economies generate stable earnings and attractive capital returns.

Peace to unleash trade and investments

We may also be on a cusp of a major diplomatic breakthrough in severely strained Sino-Japanese relations that have gravely damaged Tokyo's economic ties with its largest trade and investment partner. There are signs that Japan's long-sought summit with China could take place in Beijing on the margins of the next APEC (Asia-Pacific Economic Conference) meeting on November 10-11, 2014.

Read MoreMajority in China expect war with Japan

If indeed the Chinese and Japanese leaders do meet in Beijing, they will mark a new departure in their countries' relationships, because Japan seems ready to acknowledge that China also has a valid claim to disputed islands in the South China Sea which -- Tokyo will insist -- "remain an integral part of Japan's sovereign territory."

But here is a possibly new rider: "China and Japan agree to solve this issue through further discussions."

This event – apparently worth speculating about – has a huge potential for lifting economies and financial markets of East Asia to a completely new level.

And then, more good news about East Asia's improving security architecture may be in the offing. It appears that the estranged Korean cousins have been – seriously -- talking peace in recent weeks.

Read MoreRussia signs deals with China to help weather sanctions

China and Russia seem to have been actively involved in facilitating these contacts. Russia, in particular, wants to use good relations with its Korean neighbors to push hard for peace and cooperation, partly, it seems, because Moscow is eager to extend and modernize its rail links to the Peninsula and to build there an already agreed energy pipeline.

Investment thoughts

I maintain my long-held view of a positive investment outlook for East Asia. In addition to good economic fundamentals and large excess savings, we now also have a very realistic prospect of improving security relations that will enhance trade and investments throughout that region.

In case you might ask whether one should not focus on the bad news – Europe – for investment bargains, my answer is that, yes, that is a possibility, but there is no need to rush. Sadly, the mismanaged Europe will be an economic and political basket case for quite some time.

Enjoy the Asian ride, but don't give up on richly-valued U.S. equities. The Fed will nurse along a reviving economy, and weak wage shares will continue to boost corporate profits.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.