If anyone needed a reminder that investing in emerging stock markets can be a gut-wrenching business, the madness that transpired at the Bangkok Stock Exchange on Dec. 19 surely delivered the message. Thailand's benchmark SET Index plummeted 15%, which qualifies as a crash in just about anybody's book. It was the worst one-day downturn in 16 years.
Other emerging markets in Malaysia, Pakistan, Turkey, and India (which has suffered a severe correction this month) were all down as well in trading on Dec. 19. And all this follows an emerging-market blowout back in May. During the first three weeks of that month, the Morgan Stanley Capital International Emerging Markets Index, which tracks share price trends in 26 developing markets around the world, fell about 14%.
That was one of the worst showings since the Asia financial crisis and Russian bond default of 1998. Investors in India were annihilated over a three-day period as Bombay Stock Exchange's Sensitive Index, or Sensex, fell nearly 15% during that period.
The trigger to the market meltdown in Bangkok-the SET Index fell nearly 20% and local regulators halted trading at one point-came after Thailand moved to slap currency controls on global investors to discourage speculation in the baht, which is up more than 15% vs. the dollar this year, that has hurt the country's export price competitiveness.
The new rules would have imposed a 10% penalty on overseas funds transferred into Thailand in many cases. On Dec. 19, however, the Thai authorities abruptly reversed course after the market meltdown and canceled the new capital controls.
Foreign Investors' Big Impact
Yet the questions raised by the Thai debacle remain. The wider impact of the Thai move in other emerging markets is probably twofold. First, the velocity of money blitzing in and out of developing stock markets can be amplified by the big impact foreign investors have in many of these bourses and the "herd-like" behavior of this crowd when it senses trouble.
Second, there are plenty of investors around who remember the savage beating punters took during the 1997 and 1998 Asia financial crisis, which started, after all, with a speculative run on the baht before spreading like a miasma around the region.
However, different forces are now at work compared with the market gyrations in the late spring. Back in May, emerging markets from Russia to Egypt fell fast and furious as a triple-whammy of rising U.S. interest rates, recent pullbacks in the white-hot industrial commodity markets, and rising oil prices cast an unflattering light on Alice in Wonderland stock valuations in such markets as India.
Still, emerging markets bounced back by more than 30% from their lows after it became clear the U.S. Federal Reserve had stopped raising interest rates after 17 consecutive increases. Oil prices moderated as the year went on-and commodity prices picked up, too.
The big worry now is the outlook for the dollar, which has fallen sharply against the euro and some smaller Asia currencies such as the South Korean won and Thai baht. The Chinese carefully control the value of the yuan vs. the dollar, and so do the Japanese with the yen. But these middling and heavy export economies have absorbed bouts of currency appreciation that now has the potential to really slam their exports to the U.S., the biggest economy on the planet.
Risk of Capital Controls
The Thai response shows the risk of reverting to capital controls. The stock market rout is a reminder of just how quickly foreign investors will head to the exits if they are blindsided by an abrupt change in policy.
The worry going forward is that other economies such as Malaysia (which did impose similar controls during the Asia Financial Crisis) will follow suit and the exodus of global investors will intensify and create a lasting downward spiral in emerging-country stock markets.
No doubt about it: Some investors have been enriched beyond expectation this year in markets such as the Bombay bourse, still up 45%-plus on the year, and other developing-country stock markets such as Vietnam.
And it's hard not to be bullish on economies such as India and China for a very long time to come. Yet playing these markets, the money pros suggest, requires careful stock selection and the ability to ride out world-class volatility.
Dec. 19 was a bracing reminder that emerging-market land can be a very dangerous neighborhood for investors.
