Thailand's surprise decision to slap controls on foreign investment fueled a 15% plunge in its stock market Tuesday and rattled other emerging markets, which have been favorites of U.S. investors in recent years.
By early today the storm appeared to have blown over: Many Asian markets were rebounding after falling 1% to 3% after Thailand's move.
Still, the affair served as a reminder of how volatile smaller foreign markets can be. And the risk of short-term losses may be rising after the hefty gains in many emerging markets since 2002, some investment pros say.
"I think people aren't paying attention to the risk side of the equation," said Mark Headley, president of San Francisco-based Mathews International Capital Management, a big investor in Asian stocks.
The decision by Thailand's military government revived some painful memories for veteran investors: It was that country's move in 1997 to allow its currency, the baht, to plummet in value that set off a chain of market meltdowns across Asia.
This time, however, Thailand was trying to address the opposite problem: The government believes its currency has been too strong, in part because of heavy inflows of capital from foreign speculators. In turn, a rising baht has made Thai exports more expensive abroad.
To slow those capital inflows, Thai officials declared that foreigners effectively would be able to invest only 70% of money they transferred into the country, with the rest to be held in reserve by financial institutions. If the investors tried to pull the money out within a year, they would lose 10% of the total.
The government's decision had the desired effect on the baht, pushing it from a nine-year high of 35.2 per U.S. dollar to nearly 36 per dollar, a 2.2% drop.
But the decline occurred as some investors fled Thai markets rather than risk having their money locked up. The Stock Exchange of Thailand's main index plummeted 108.41 points, or 14.8%, to 622.14, a two-year low.
Early today, the government backtracked a bit. Finance Minister Pridiyathorn Devakula said the reserve requirement wouldn't apply to stock investors, but would still cover other investments such as bonds.
The Thai stock market shot up 9.5% in early trading today.
Some U.S.-based investors in Asian stocks said the Thai government, which was installed by a military coup in September following the overthrow of Prime Minister Thaksin Shinawatra, showed extraordinary naivete.
"We suddenly have a junta running the country that is not investor savvy, to put it mildly," said Anthony Cragg, manager of the Wells Fargo Advantage Asia Pacific stock mutual fund.
Still, the move addressed an issue that is vexing other Asian nations as well, including South Korea and Singapore: Their currencies have been rising against the dollar, which threatens their export-dependent economies.
The problem with using capital controls on foreign money is that such restrictions often trigger market convulsions. Because money now moves so freely around the globe, investors aren't willing to put up with government-imposed limitations; they'll simply flee.
"This will warn other emerging markets to think carefully before putting on such draconian measures," Headley said.
As Asian markets opened today, there seemed to be little fear that Thailand's move might be duplicated elsewhere in the region. The Singapore stock market, which slid 2.2% on Tuesday, rose 1.3% in early trading today. Malaysia's main market index gained 1% today after falling 2% on Tuesday. The South Korean market was up 1.2% after losing 0.4% the previous day.
"I don't think there's any contagion from this," Cragg said.
Thailand, however, may continue to pay a penalty, he said. Investors may decide the country is "too troublesome to bother with," he said.
Some global investors may have been hoping for a broader and deeper sell-off in emerging-market stocks, to give them a chance to buy in at lower prices.
Investors got such an opportunity in spring, when markets worldwide dived on worries about the effects of rising U.S. interest rates. Some highflying emerging markets lost 15% to 30% of their value between mid-May and mid-June.
But their recovery from that plunge also was rapid -- which has reinforced the appeal of staying invested in the stocks, said Cameron Brandt, research chief at Emerging Portfolio Fund Research, a Cambridge, Mass.-based firm that tracks capital inflows into foreign markets.
South Korea's benchmark index, for example, tumbled 18% from mid-May to mid-June but has since rebounded 20% as money has poured back in. Many emerging markets are up more than 30% year to date, far better than the 14% gain of the average U.S. blue-chip stock.
Analysts say the demand for emerging-market stocks in part reflects institutional investors' search for better returns on their money than is available in bonds and short-term bank accounts, given that interest rates worldwide remain relatively low compared with what investors were used to in the 1980s and 1990s.
"As long as there's this much money sloshing around, people are going to be reluctant to abandon their positions" in emerging-market stocks, Brandt said.
Many portfolio managers, however, are advising caution. Although the long-term growth outlook for many foreign economies, particularly in Asia, remains exciting, four straight years of spectacular stock gains have raised the level of risk in emerging markets, Headley said.
"It's a little frothy," he said.
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The Thai government's decision to slap capital controls on foreign investors sent many emerging-market stocks lower worldwide.
*--* Pctg. chng.: Country/index Tues. YTD Thailand/SET -14.8 -12.8 Indonesia/ composite -2.9 +49.4 Poland/WIG -2.8 +42.6 India/Sensex -2.5 +42.4 Malaysia/ composite -2.0 +17.9 Turkey/ISE-100 -1.9 -1.8 Russia/RTS -1.3 +63.3 Mexico/IPC -0.9 +43.9 South Korea/ composite -0.4 +3.5
Changes measured in local currencies.
Source: Bloomberg News