Investors in south-east Asian equities

There is nothing like sitting on a fat, unreal­ised profit to make an investor nervous, and a fat paper profit is precisely what you should have if you put your money into south-east Asian equities at the start of the year and kept it there.

The phenomenon of soaring stock prices has not been con­fined to the big­gest markets in the region. Trading volumes have swol­len too.

Investors, who are understandably considering selling their south-east Asian shares to realise profits, are faced with a familiar dilemma: they cannot think of anything they would rather buy, but they fear a regional stock-market crash or at least a sharp cor­rection in the weeks ahead.

Indeed, this week has seen reverses in many of the region’s markets as investors have decided to book some of the profits following the recent strong advances.

Most of the stockbrokers analysing such risks start by looking at the reasons for this extraordinarily robust performance by south-east Asian equities. Some of them are obvious. Except in the Phi­lippines, the region’s econo­mies have shrugged off reces­sions in the Japanese, US and European markets and are typ­ically growing by 8 per cent a year.

Some of the causes are peculiar to particular markets. In Malaysia, stock market activity has been fuelled by political maneuvering and the distribution of financial favours. In Singapore, the government has launched a campaign to promote share ownership.

Such special factors, how­ever, are only part of the story. Stock market analysts agree that south-east Asian markets, like equity markets elsewhere, are “liquidity-driven”. In other words they are beneficiaries of the worldwide fall in interest rates which has tempted large sums of money out of bank deposits and into equities.

Previous rallies in south-east Asia have often been prompted by local speculators driving up the price of secondary stocks, with foreign investors tagging along behind saying: “We know this company is funda­mentally unsound, but we’re going to buy it anyway because we know local shareramping will increase the value of the shares.”

This time, the situation is different. Foreign investors, particularly US mutual funds increasing their exposure to the economies of south-east Asia, have led the charge, buy­ing blue chip shares.

The new money makes a pro­found impact. Although the capitalisation of south-east Asian markets is growing fast - and some of them can now absorb the $ lm plus buy orders demanded by big international investors - their small size means that a rush of foreign buying can have a disproportionate effect on share prices and market indices.

Stock market analysts say the principal risk of a sharp fall in the value of south-east Asian stocks will come from abroad. If world interest rates rise, foreign money may try to get out of Asian stocks as quickly as it is now trying to get in; just as demand for relatively illiquid stocks forces prices to rise exceptionally sharply, so selling pressure forces prices sharply down.

A further problem in south-east Asia, with the notable exception of Singapore, is that several markets are poorly regulated. Foreign investors are partly shielded from this by the preponderance of blue chips in their portfolios, and both Thailand and Malaysia have recently established securities commissions in an attempt to improve company disclosure and control insider dealing.

No-one would be surprised if a sharp fall in regional equity values revealed a few companies with difficulties that they were able to hide in a bull market.

Price/earnings ratios are not excessive on south-east Asia markets in comparison with the industrialised world and price levels can be justified by strong corporate earnings growth.

Any fall in Asian stock markets prompted by an outflow of foreign funds is likely to be limited by the fact that Asians are becoming increasingly wealthy and active in their own markets. Even during the recent surge of foreign buying, foreign investors in the Thai market were accounting for only about a fifth of turnover.

Only a rash investor, however, would rule out the possibility of a sustained sharp downward correction in equity values across the region after such a bull market.

Indeed, recent Asia’s financial crisis has swept up some of the world’s best managed companies. So no one would fault you if you steered clear of Asia until the ruckus dies down.

VOCABULARY:

unrealized profit	нереализованная прибыль
paper profit	см. unrealized profit
to realize profit	зд. получить реальную прибыль
stock-market crash	кризис на фондовом рынке; резкое падение цен на акции
correction	обратное движение цен (обычно снижение)
to book profits	зд. реализовать прибыль
advances	зд. рост цен на акции
to promote share ownership	содействовать расширению числа держателей акций
«liquidity-driven»	ориентированы на высоколиквидные инструменты
beneficiary	извлекающий прибыль, выгодоприобретатель
bank deposit	банковский депозит (вклад)
rally (ies)	значительное повышение курсов ценных бумаг
secondary stocks (secondaries)	«второстепенные» акции, т.е. акции небольших компаний, инвестиции в которые связаны со значительным риском
share-ramping	искусственное взвинчивание цен
mutual funds	совместные фонды
blue chips	популярные акции крупных и надежных компаний
capitalisation	капитализация, т.е. суммарная рыночная стоимость выпушенных акций компаний, а также стоимость всех акций на данной бирже.
market indices	биржевые индексы
company disclosure	отчетность компаний, предоставление сведений о своей деятельности
insider-dealing	незаконные операции с ценными бумагами на основе полученной закрытой («внутренней») информации о деятельности компании-эмитета.
bull market	конъюнктура рынка, характеризующаяся ростом котировок.
Price/earnings ratio (s) (P/E ratio; PER)	индекс доходности, т.е. отношение рыночной цены акции компании к ее чистой прибыли в расчете на одну акцию
corporate earnings	корпоративные доходы
ruckus	зд. биржевой кризис, паника

Text D

Read the text and outline the key points.

Translate the part “Do you want to be in my band?” from English into Russian.

3. Make a précis and an annotation on the text.

FIXED AND FLOATING VOTERS

Every time one of the world’s curren­cies plunges, policy-makers start to wonder aloud whether anything can be done to prevent a repeat performance. The recent fall in the dollar has proved no exception. The president of the European Commission, and various French politicians are among those who have called for a revival of in­ternational exchange-rate agreements. Such calls have rekindled a long-running debate among economists about the rela­tive merits of fixed and floating exchange-rate systems.

The beauty of a floating-rate system is that it allows a country to adjust monetary policy without worrying about the ex­change rate. Provided that domestic wages and prices do not immediately ad­just to offset any exchange-rate move, it also allows them to respond to an external shock, such as an oil-price rise, through a change in the exchange rate rather than a more painful domestic adjustment.

There are two snags, however. Float­ing exchange rates can be highly volatile. This can cause price instability that harms prospects for trade and investment. Un­der a floating-rate system a government may also be tempted to pursue an exces­sively loose monetary policy, which re­sults in higher inflation. Fixed-exchange regimes avoid both of these problems; but at the cost of making it harder for coun­tries to adjust to external shocks.

Ideally, governments would like the best of both worlds - currency stability, but also the ability to adjust exchange rates if absolutely necessary. Barry Eichengreen, an economist at the University of California, Berkeley, suggests that the success of any managed exchange-rate regime that seeks to deliver this combination will depend on three tests. It must be flexible enough to cope with economic shocks. It must be robust enough to convince the markets that gov­ernments are committed to defending their pegged rates in all but the most ex­ceptional circumstances. And it must be able to see off speculators who decide to put this commitment to the test.

Some previous managed exchange-rate systems have more or less done all this. Under the classic gold standard, for instance, countries suspended convert­ibility if their economies ran into serious trouble. Under the Bretton Woods system of fixed-but-adjustable exchange rates, winch ended in 1971, the International Monetary Fund provided liquidity to help countries maintain their exchange-rate peg. In circumstances or “fundamental disequilibrium”, however, they were allowed to devalue. The early years of the European exchange-rate mecha­nism (ERM) also passed the tests.

But in future similar regimes will find it harder. He reckons that political pressure to use the exchange rate to cope with economic shocks will undermine a pegged system’s credibility, tempting speculators to attack it. And he suggests that greater capital mo­bility will make it increasingly difficult for countries to defend target parities against speculators.

That may not stop politicians from trying. Among other things, they can raise interest rates, reimpose capital controls or call for foreign support to prop up their currencies. But this will not be enough. Financial in­novations such as derivatives and in­creased cross-border investment will make capital controls all but impossible to enforce. Raising interest rates to defend a currency is often politically unpopu­lar - and, in debt-laden countries, may be counter-productive because it increases debt-interest costs. Nor can any country count on unlimited intervention by oth­ers to support its currency.

Any sys­tem based on explicit exchange-rate tar­geting is doomed. The only options are a floating-rate system or mone­tary unification. This does not mean that countries cannot manage their floating rates by intervening in currency markets; but it does mean that they should not tar­get specific rates. There is evidence to sup­port this view: fewer countries now peg their exchange rates than a decade ago and the ERM, having shed both the pound sterling and the Italian lira, has had to broaden its target ranges.