The speed with which tremors from Hong Kong affected other markets around the world has sent shock waves through investors everywhere. What then is the best option for the investor in these turbulent waters? MOIN SIDDIQI takes a calm and calculated look.
The globalisation of financial markets as a result of the operations of multinational companies (MNCs), trade and investment, has led to steep corrections in equity prices in the Far East, Europe, North and South America, and South Africa.
The liberalisation of capital-flows enables investors to recoup losses in one market by selling in another. In the February 1997 issue of African Business, readers were cautioned of the higher risks facing portfolio managers in 1997. Since the summer, market valuations in the US, continental Europe, and Hong Kong have been overextended, as is reflected in higher price earnings ratios and lower dividend yields.
The crash in Hong Kong, that most speculative of all the major markets, acted as a catalyst in prompting overdue corrections in developed markets. Investors aggressively took profits from hugely overpriced stocks (the US Dow Jones international benchmark for global market indices had doubled in value since 1994).
History shows that October is a volatile month. Fund managers usually liquidate long positions, hence opportunities arise to lock in profits. Despite the market's slump, investors are still sitting on annual capital gains in the more mature markets. This contrasts with the scenario of the October 1987 crash.
Rational corrections are healthy reactions in periods of over-valuation, and will benefit Hong Kong. Sell-offs in Latin American and South African markets, where interest rates were recently cut to 16%, and where further reductions are projected for 1998, were unjustified however.
Amid turbulence, emerging markets, irrespective of their economic fundamentals, are hit by the tendency of flight to quality. In a world of fast-moving and inter-linked markets, volatility is inevitable.
The reasons for the recent turmoil are quite simple: psychological fears in one major market lead to panic selling in others. Markets react at times to hysteria, and speculative overshooting. Weak futures markets and computer-generated sell programmes from index-tracking funds, can all lead to turbulence, which bears little or no correlation to economic reason. Higher p/e ratios will increase downside risks, especially if growth in corporate earnings is...