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They’re called emerging markets for a reason: nasty shocks emerge from them. At least, that would be a fair conclusion for any investors who’ve been burned by this week’s turmoil in Hungary and Thailand.
In Hungary, the government is in crisis after prime minister Ferenc Gyurcsany’s extraordinary admission that his party had lied to the electorate about the state of the economy. It may have been engagingly candid – we’d love to see Tony and Gordon ‘fess up in the same style – but it’s scarcely the kind of thing that will make him popular at a time when he needs to force through some painful reforms.
In Thailand, the political process has gone several steps further: a military coup has deposed Thaksin Shinawatra, the increasingly headstrong and heavy-handed premier. Although the coup has been peaceful, tanks on the street often lead to a bloodbath on the bourses. But while the initial reaction to both crises was the same – a moderate sell-off – sentiment now seems to be changing...
In Hungary, the BUX index is down 5% since the news broke. The forint, which has been steadily weakening for over a year, ticked down another 1% against the dollar. And comment on the outlook is almost universally negative.
That makes sense. The economy is perhaps not in as bad a shape as Gyurscany claimed when he said that only “divine providence, the abundance of cash in the world economy and hundreds of tricks” were keeping it afloat. Growth is decent at 3.8%, inflation acceptable at 3.5%. But there are problems such as the high current account and budget deficits. Public spending cuts are needed and this will be tricky for a wounded government to push through. Stagnation beckons until the crisis is resolved – most probably by the government falling.
Meanwhile, the reaction to the Thai situation is shaping up to be quite different. Yes, the SET index is down nearly 2% and the baht has fallen around 0.5%, but both are already well off their intraday lows. Many commentators are already talking about this being a good buying opportunity.
Yet although a bounce is likely, the long-term outlook is still weak. To be fair, there are positives: speculation about a coup had been circulating for a while and at least the uncertainly has been removed. And Thaksin is no great loss: the long-running rumours of corruption were growing stronger, while there were signs that he was planning to renege on an agreement to step down from office.
Still, military coups are never the ideal way to resolve any problem. The Thai army has a decent track record in bringing its interventions to a tidy conclusion – it’s had plenty of practice over the years – and has promised to hand over power to a civilian government soon, followed by elections in October 2007. But with generals, there’s always the risk of them backsliding once they discover the perks of running a country instead of a brigade.
More significantly, there’s nothing a coup can do to overthrow Thailand’s economic problems. While the country is in vastly better shape than during the Asian crisis, there are good reasons why it’s among the region’s cheapest markets. Expected growth of 4 – 4.5% is dull compared with many of its neighbours and it’s overly dependent on exports, which are vulnerable to the looming US economic slowdown.
The truth is that neither country presented a great investment case even before these incidents – they just weren’t cheap enough given their problems. This is a symptom of a bigger issue: yield-hungry investors have bid up the price of most assets to the point where they no longer offer enough return for the political and economic risks involved.
In other words, too many people are betting that the current benign conditions will continue forever. They won’t, of course. And when things unravel, they often unravel together, regardless of whether they’re obviously connected or not. Hungary and Thailand may be just the early tremors; when the global economy turns down, expect some more nasty surprises to emerge.
Turning to the stock markets….
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The FTSE 100 rallied yesterday afternoon to close at 5,896, a 30-point gain. Grocer William Morrison and cruise operator Carnival made the biggest gains of the day on the back of strong earnings. The former’s share price rose by nearly 8% following a return to profitability in the first half of the year. Power stocks were the worst performers of the day as carbon saw its biggest fall in four months. International Power, Drax and British Energy Group were all lower. For a full market report, see: London market close
On the Continent, the Paris CAC-40 rose 15 points yesterday to close at a four-month high of 5,208, tracking early gains on Wall Street. Shares in aerospace company EADS continued to fall, though, following the announcement of more delays to its Airbus programme. In Frankfurt, the DAX-30 closed higher, up 7 points to 5,962.
After a strong start on Wall Street, stocks fell sharply following news of an unexpected contraction in manufacturing output this month from the Philadelphia Federal Reserve, stoking fears of an economic slowdown. The Dow Jones closed 79 points lower, at 11,533, having climbed as high as 11,640 earlier in the day. The S&P 500 closed 7 points lower at 1,318, whilst the Nasdaq was 15 points lower at 2,237.
Asian markets tracked US losses, with the Nikkei closing 199 points lower at 15,634.
Crude oil was trading slightly higher this morning, at $61.95 a barrel, whilst Brent spot was trading at $60.52 in London.
Spot gold extended its gains overnight, and last traded at $587.30.
And in London this morning, the government announced that it had awarded the South Western rail franchise – which covers suburban commuter services from places such as Wimbledon and Richmond into London Waterloo – to Stagecoach. The ten year contract, for which Stagecoach will pay a £1.19bn premium, will bring in an extra $500m worth of sales a year.
And our two recommended articles for today…
Three reasons why Stephen Roach is bearish on commodities
– Could we be facing a downturn in the commodities market? Morgan Stanley economist Stephen Roach thinks so. Click here to find out which indicators to keep an eye on: Three reasons why Stephen Roach is bearish on commodities
Why gold is not like other metals
– The gold price may have slid south along with other metals in recent weeks, but don’t expect it to keep going in the same direction. Why? Because gold is a very different sort of investment, says Paul van Eeden. To find out when gold will uncouple from base metals, read: Why gold is not like other metals