|
PureBytes Links
Trading Reference Links
|
Thursday January 15, 11:49 pm Eastern Time
OPINION - Asia currency crisis - By Mark Mobius
By Dr J. Mark Mobius, Templeton Asset Management Ltd
HONG KONG, Jan 16 - The Asian currency crisis, which
started in July in Thailand, has had a dramatic and
largely unanticipated effect on the region's equity
markets.
As of December 5, 1997, the Thailand market was down
88 percent in U.S. dollar terms from its all-time
high. Enormous falls from all-time highs have also
been seen in Korea (85 percent) and Malaysia (72
percent).
Many other countries in the Asia region have seen
equity prices fall by more than 50 percent from
all-time highs. The number of countries involved and
the extent of the market declines indicate that the
current crisis dwarfs the Mexico crisis of 1995.
In hindsight the origins of the crisis can be traced
back to the imprudent exchange rate policies adopted
by the governments of the region which encouraged
companies to borrow excessive amounts of foreign
currency fuelling a region-wide speculative bubble to
rival that of Japan almost a decade earlier.
When the currencies of the region finally succumbed
to the enormous pressure of huge current account
deficits and speculative attacks, they fell like rocks.
The devaluation of the currencies had a knock-on
effect on the equity markets of the region because so
many companies and governments had borrowed U.S.
dollars heavily, attracted by the low dollar interest
rates being offered during the last few years.
Their governments had assured them that the exchange
rates of their local currencies against the U.S.
dollar would not change so they assumed no or little
currency risk.
The domino effect of falling currencies thus had a
disastrous impact on the cost of paying back the U.S.
dollar loans putting many companies into bankruptcy
and thus affecting the banking systems in those
countries.
The rush for cash then consumed equity market prices
in a wild melee of selling the likes of which has not
been seen for many years. The Asian currency crisis
spells the end of the system of U.S. dollar pegs for
the region's currencies which has been in existence
for a long time. What system will replace it is, as
yet, unclear.
A period of floating exchange rates in the region
would prevent a similar asset price bubble occurring
again but would also be an impediment to trade.
Perhaps a system similar to the European Union's
Exchange Rate Mechanism (ERM) could be developed in
Asia.
I believe that such a system founded on a gold
standard could be implemented effectively in Asia. Of
course, this would be fraught with difficulties.
The fundamentals of the countries in the region are
even more disparate than those in Europe where the
introduction of a unified currency is now being
implemented.
However, the alternative of floating exchange rates
creates all kinds of problems for domestic exporters
and importers in Asia.
The good news is that floating rates would force
governments in the region to be accountable for their
actions to the world markets. This might encourage
them to adopt prudent macroeconomic policies and rein
in government spending on inefficient projects.
The International Monetary Fund has come in for some
serious criticism in recent months, both for its
handling of the crisis and for the austerity measures
it has imposed on the countries that it has bailed out.
In the long run, however, the structural changes that
are being enacted now in Korea, Indonesia and
Thailand will be of immense benefit to these
economies and help to prevent such crises occurring
again.
However, the history of the 20th century has shown
that governments cannot resist fixing their
currencies in some way and more often than not they
pay the price for their inability to learn from their
mistakes.
We see the Asian currency crisis as an excellent
opportunity to purchase stocks at bargain prices and
we have been aggressively buying in those countries
where equity prices in U.S. dollar terms have fallen
the furthest.
In several countries we now have the situation where
panic selling has driven both equity prices and the
currency to ridiculously low levels.
Many currencies that were overvalued before the
crisis are now significantly undervalued and from a
long-term perspective many stocks in the region
represent very good bargains.
With day-to-day trading in the region still looking
pretty scary it takes great fortitude of mind to take
the plunge and invest. The best time to buy is when
blood is running in the streets, even if it is your
own.
However, while this is a great long-term strategy
there remains the possibility that the crisis of
confidence among investors will push equity prices in
the region lower and that currencies will continue to
depreciate.
Investors in these markets must be ready to
experience losses for a while before the profits
start coming in.
////
===
john@xxxxxxxxxxxxxx
It goes without saying that you should never have
more children than you have car windows
--Erma Bombeck
_________________________________________________________
DO YOU YAHOO!?
Get your free @yahoo.com address at http://mail.yahoo.com
|