Stocks in Emerging Nations Fall Even More
Stock markets in emerging economies fell further worldwide Monday, as a continuing downturn in Asian markets spread to Latin America.
The falling markets reflect economic problems related to recent currency devaluations in Asia, raising fears for the U.S. as well. If trends continue, exports to Asia could fall, and U.S. stock prices and interest rates could be affected if Asian investors need to pull money out of U.S. markets.
Brazil’s Bovespa index fell 5.3%, bringing the two-session drop to more than 14%. Argentina’s stock market, closely linked to Brazil’s, fell 2.8% after a 3.7% drop on Friday. Peru’s stock market also closed down by 0.6%.
Brazilian interest rates rose, and the country’s currency, the real, weakened amid speculation that the government might relax its strong-currency policy and allow the real to devalue at a faster clip.
The declines in Brazil and elsewhere demonstrate the linkage that all emerging countries have. The market drop is part of the ongoing crisis that began in July with Thailand’s financial problems and subsequent 40% devaluation.
The shock continues to reverberate. Hong Kong stocks fell 5%, on top of a combined skid of 9% on Thursday and Friday. Stocks also fell for a third straight day in the Philippines, Thailand, Singapore and in Japan, where averages hit a four-month low Monday.
Indonesia’s stock market hit a three-year low as its currency, the rupiah, and the Malaysian ringgit slid further against the dollar. Taiwan’s key stock index dropped 2.6% to its lowest point since July 12.
Asian investors are still very uncertain where stocks will settle, judging from a spate of “panic selling” that prevailed in the Hong Kong market during the last 20 minutes of trading Monday, said Howard Gorges of South China Securities.
The International Monetary Fund hoped aid packages it assembled for Thailand and the Philippines would staunch the crisis, but investors remain unconvinced. Fund managers are heading for the exits, and billions of dollars of investments are leaving for more stable economies, observers said.
Robert Dederick, economic consultant at Northern Trust Co. in Chicago, said the area was vulnerable to a shock.
Speculative trading has sent currencies in neighboring countries, notably Malaysia, the Philippines and Indonesia, plummeting against the dollar.
“It’s not clear yet if the worst has been seen in Asia, and until that’s cleared up, Latin American markets will be volatile,” said Gordon Lee, an analyst with Deutsche Morgan Grenfell in Mexico City.
Mexico’s stock market was closed Monday in observance of President Ernesto Zedillo’s state of the union address. But Mexican stocks fell 7.5% last week, and analysts feared stocks could drop further today because of Asian instability and the political uncertainty surrounding the newly installed opposition-controlled Congress.
Lee said investors are also worried that the United States and Germany might soon raise interest rates--moves that would certainly attract more investors away from riskier Third World markets.
“Mexico and Argentina might have to raise interest rates in response, and that would hurt their economies,” Lee said.
The weakening in Brazil’s currency was sparked by tacit acknowledgment by Minister Pedro Malan in a newspaper interview that Brazil’s currency is overvalued, analysts said.
European markets provided the bright spots in Monday’s trading, as shares on the Frankfurt exchange rose an average 2% and those in Paris by 1.3%. London’s exchange, stilled by the shock over the death of Princess Diana, closed up 1.1% in thin trading.
Wall Street’s recent pullback may be partly a response to the Asian crisis.
“We are already in the process of a correction right now, I believe,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “The problems in Southeast Asia are . . . a contributing cause to the correction, but I don’t think that is the major cause.”
Continued problems in Asia could pose a threat to the U.S. economy by putting a damper on trade and business deals in the region, analysts say.
“Those countries have become increasingly important to us as trading partners,” said Cynthia Latta of DRI/McGraw Hill in Lexington, Mass. “If their economies flop, they won’t be able to afford our goods.”
Singapore bought $8.7 billion in U.S. goods over the first half of the year and Malaysia purchased $5.3 billion, government figures show.
Some of the countries borrowed heavily from abroad to buy goods from the U.S. and elsewhere and to buoy their once-high-flying economies, building up hefty debts and trade deficits.
With the recent run-up in the U.S. dollar, their economies have been badly pinched. Although the strong dollar has made U.S. goods more costly for those countries, it has also made their goods cheaper for American buyers.
Some analysts say a slowdown in exports to Asia could help slow the robust growth of the U.S. economy. The U.S. government reported Thursday that the economy expanded at a 3.6% annualized clip in the second quarter, a figure that raised fears of mild price increases ahead.
More troubling for Wall Street would be if Asian central banks and other big investors unload their large holdings of U.S. Treasury securities, which could also work to raise U.S. interest rates.
Even though prices of Southeast Asian stocks are declining, analysts aren’t yet advising clients to snap up shares.
“With the continued tumble in the Asian equity markets, we remain cautious,” said Holly Sze of Smith Barney in New York.
*
Associated Press and Bloomberg News were used in compiling this report.
