Barron's. Markets Buckle Worldwide, and Malaysia Bows Out; Have You Heard Talk of a Global Recession?
September 7, 1998
By Peter C. Du Bois
Exit Malaysia, stage left, condemned by foreigners for abandoning
free-market precepts but beloved by local stock market traders. All of which
proves, for starters, that a strong-willed xenophobe can rig a bourse as well
as any other manipulator.
The latest chapter in this saga began last Tuesday, when Malaysian Prime
Minister Mahathir Mohamed imposed draconian currency controls that
prohibit trading his nation's currency, the ringgit, abroad. Any ringgit held
overseas must be repatriated by September 30 or become worthless. At the
same time, foreigners who own Malaysian stocks face harsh restrictions on
taking the proceeds of rupiah sales out of Malaysia.
Dow Jones Global Indexes | Emerging Markets | Global Stock Markets
Wednesday, Mahathir fired Anwar Ibrahim, his deputy PM and internationally
respected finance minister. Thursday, having inoculated Malaysia against
foreign financial interference, he cut domestic interest rates and began to
reflate his economy in splendid isolation.
Booted From EAFE Index
Initial foreign retaliation came Friday. Morgan Stanley Capital International
deleted Malaysia from its benchmark EAFE index of developed stock
markets, effective September 30. MSCI reckons that $150 billion of global
pension-fund money is indexed to EAFE, with $600 million allocated to
Malaysia (which carries a 0.4% weight). Presumably, these Malaysian stocks
soon will be sold, but it's unclear where, to whom or at what price. MSCI
kept Malaysia for now in its Emerging Markets index, where it boasts a 4.4%
weighting. [Money will be reallocated to countries like Brazil.]
Not surprisingly, Malaysian shares, as measured by the dollar-based Dow
Jones Global Index, endured a wild ride last week. The indicator fell 3.38%
Monday, another 13.27% Tuesday. It then turned around and rallied 12.14%
Wednesday, 6.27% Thursday and an amazing 16.09% Friday. At week's
end, the index still was down 38.86% year-to-date.
Friday's spurt was fueled by the initial repatriation of ringgit held in Singapore.
Once upon a time, before emerging stock markets became venues in which
to speculate, and before derivative instruments were invented and became
weapons of portfolio destruction, the dog days of August were a quiet time
for money managers. Your pooch slept in the shade while you read a good
book on the porch.
Jump to August 1998. Global bourses sank, and your pet canine turned into a
rabid Rottweiler. How many markets did he infect? Of 50 (27 emerging, 23
developed) tracked by Morgan Stanley Capital International's proprietary
indexes, only two posted gains in dollars last month. Morocco rose 7.1%,
Pakistan 4.9%.
Of the 25 other emerging markets, 23 suffered double-digit declines. Russia,
off 59.2%, and Venezuela, off 43.4%, fared the worst. Eight bourses fell by
between 39.2% and 30.8%; another nine dropped by between 29.1% and
22.6%. Four more fell between 17% and 11.5% of their value erased.
Relatively unscathed were Jordan, down 0.5%, and India, down 8.5%.
All 23 developed markets fell, 20 by double-digit sums. Not suprisingly,
Malaysia, off 28%, took the booby prize. On a relative performance basis
nine bourses (Hong Kong, Belgium, U.K., Denmark, France, Japan,
Netherlands, Australia and Portugal) beat the U.S. (off 14%) in August.
Global marts fell again last week, with Brazil especially weak (see nearby
table). Among the reasons: Moody's downgraded the country's credit rating.
Telecom giant Telebras, which carries the biggest weight in the Bovespa index
(about 45%) was heavily sold. Telebras, which was split into 12 separate
units in a recent privatization, soon will disappear as a single entity.
What next? James Montier, a London-based global strategist at BT Alex.
Brown, believes there's a 50% chance of a global recession within 18 months. [Greenspan better get busy...]
He notes that until recently, Europe had been the powerhouse of the global
economy. However, "economic recovery in Germany now appears to be
stalling out. Industrial production grew at just 1.6% year-over-year in June,
new order growth continues to decelerate, and the [German] consumer looks
to be retreating, with retail sales volume falling no less than 2.7% year-on-year
in June."
To Montier, this raises questions about the ability of German banks to avoid a
credit crunch. In his view, "They look to have made similar errors to U.K. and
U.S. banks during the 1980s debt crisis, and are exceptionally vulnerable to
default from Eastern Europe."
One upshot: "If German growth continues to fade at such an alarming pace,
the rest of Europe will likely find it hard to keep its head above a recessionary
quagmire."
At the same time, U.S. consumers could buy less stuff in the wake of ongoing
stock market declines. Not good news.
Return to top of page | Format for printing
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
|
