Crises Not ‘Devastating’

Sat., Nov. 15, 1997

Tim Quinson Bloomberg News

Emerging market stock and bond mutual funds lost almost a quarter of their value in the past three months, following a plunge in some of the world’s biggest developing country markets.

The average diversified emerging markets fund fell 24.7 percent since mid-August, with funds that focus on Southeast Asian stocks reporting the biggest losses, according to fund researchers Morningstar Inc. Funds, such as Morgan Stanley Asian Growth and Montgomery Emerging Asia, are down 45 percent in the past three months.

The market turmoil started early this summer in Thailand when the government devalued its currency. It then moved to the Philippines, Malaysia and Indonesia, before spreading to Hong Kong, Korea, Russia and Brazil. Now, even Japan and the U.S. markets are being affected by concern about the worldwide economic outlook.

Are investors overreacting? The brokerage firm Morgan Stanley Dean Witter published a report today saying they may be.

Morgan Stanley’s chief economist Stephen Roach wrote in his report that the currency crises won’t have a “devastating impact on the global economy at large.”

The main reason is developing countries still make up a small percentage of the global economy, Roach wrote. Asia, excluding Japan, accounts for just 7 percent of global trade, he wrote. This share falls to 4 percent when China and India are excluded.

“And yet it has become conventional wisdom in the global investment community to presume the turmoil in Asia is now injecting a major deflationary impulse into the global economy,” Roach wrote. “In my view, nothing could be further from the truth.”

But, there are signs that some markets may be “bottoming,” said Lincoln Rathnam, president of Schooner Asset Management LLC in Boston, which specializes in emerging markets investments.

Hong Kong’s benchmark Hang Seng Stock Index, for instance, has been hovering at the 10,000 level for the past three weeks, after falling from a high of 16,497.6 since Aug. 14.

The Southeast Asian markets will remain volatile until the end of the year but investors would be wrong to ignore the region’s markets altogether, said James Tso, who manages about $12 million that’s invested mostly in the Asian markets.

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