Caveat investor

'THIS WAS NOT a mistake," said Pridiyathorn Devakula, Thailand's finance minister, after imposing currency controls this week that led to a 15% plunge in the country's stock market. It was the most colossal blunder by an Asian central banker since Malaysia tried its own currency manipulation experiment in 1998, with similarly disastrous results.

The Thai move sparked uncomfortable reminders of the 1997-98 Asian financial crisis. It was Bangkok's decision in 1997 to stop pegging the baht to the dollar that triggered a financial meltdown in much of the developing world. The result was a rapid plunge in the currency and a retreat of foreign investors, with a domino effect in other Asian countries.

Asian economies are a lot more stable today than they were a decade ago, but the news out of Thailand -- a country that has seen 18 military coups (the most recent one in September) since abolishing its absolute monarchy in 1932 -- serves as a reminder that emerging markets can be rather volatile, a truth investors fortunately have been shielded from in recent years. For all the post- 9/11 sense that it's a perilous world out there, the last few years have been a remarkable period of global financial stability. There was a time when the likes of Mexico, Argentina, Thailand and Russia were in and out of the International Monetary Fund's emergency room, but in recent years there have been no high-profile meltdowns that threatened the global economy.

Indeed, the positive spin on the Thai blunder this week was the speed with which the government retreated from its panic-inducing announcement. There is a self-disciplining aspect to an ever more interdependent financial world.

Still, complacency is a danger. A record $260 billion is expected to be poured into emerging-market equity investments in 2006, according to the Institute of International Finance. It's not hard to see why: The U.S. economy is expected to grow by 2% to 3% this year, compared to more than 5% in many developing countries. It makes sense for Americans and others to invest more of their assets in emerging markets. But everyone needs to remember that "risk premium" is another term for the higher potential returns these markets offer. Let's hope there is no devastating financial crisis in the foreseeable future, but an equal danger would be an assumption that all volatility is a thing of the past.

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