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BY RAJESH MAHAPATRA
AP Business Writer | Monday, May 29, 2006 | (No comments posted.)
NEW DELHI | When the U.S. Federal Reserve raised interest rates two weeks ago -- and suggested more hikes might come -- stock investors in emerging markets who had enjoyed spectacular returns over the past year had little clue their ride was about to end.
In the following days, metal prices plunged and worries grew about the U.S. dollar's drop. The confluence of events scared some investors into dumping shares, which in turn made others anxious, prompting them to sell.
The result: Stock markets from Tokyo and Bombay to Russia tumbled, leaving investors worried if this was a crisis-in-the-making.
India's market has been hard hit. After nearly doubling since April 2005, its benchmark Sensex index has plunged 14.3 percent since reaching an all-time high on May 10 -- the same day as the Fed's move.
In Japan, the Nikkei 225 average has tumbled 7.6 percent since May 8 -- after surging 54 percent during the previous 12 months -- and Hong Kong's market is down 8.1 percent since the same date. The Russian market dropped 25 percent drop from early May through Thursday.
Many analysts say the decline is a "correction" -- market talk for healthy declines that bring stocks closer to their true values -- and not the beginning of a meltdown.
"I would say this is part of a global correction triggered by concerns about U.S. inflation and interest rates," said Shane Oliver, the head of investment strategy at AMP Capital Services in Sydney. "But I don't think it's the start of a bear market."
Some emerging markets had risen too far too fast, said Ben Kwong, chief operating officer of brokerage KGI Asia in Hong Kong.
"They were extensively overbought. Any factor that's going to make investors uneasy will trigger a sell-off," Kwong said. "Greed and fear are contagious."
Few doubt the economic potential of Asia's dynamic economies, particularly India and China. Amid the turmoil, the Bank of China, the mainland's second biggest bank, raised $9.7 billion in an initial public offering in Hong Kong this week, the largest IPO in six years.
Russia's key market index bounced back nearly 5 percent on Friday, in part because steel stocks put in a strong showing, lead by Russian giant Severstal whose shares jumped on news of a deal with thee world's No. 2 steel maker Arcelor SA.
But while many emerging markets recovered Friday, analysts warn that the markets will remain volatile for at least awhile.
Investors are still worried that the U.S. central bank may keep raising interest rates, slowing the U.S. economy and undermining demand for Asian exports.
Continued weakness on Wall Street and in the U.S. dollar, which hurts exporters from emerging markets, are also weighing on sentiment.
And prices of commodities such as copper and aluminum, which have fallen after soaring for two years on Chinese demand, remain unsteady.
South Korea's benchmark index, which soared 59 percent in the 12 months prior to May 11, has since tumbled 9.8 percent, while Singapore's market has dropped 8 percent since May 8.
The Bank of Mexico noted that volatility in emerging markets knocked nearly 10 percent off the Mexican stock market's leading index before it rebounded on Thursday.
"There are renewed fears about higher world inflation, and uncertainty has increased as to how the main central banks will react and the impact on economic activity," Mexico's central bank said. "The markets have reacted nervously to the information published day-to-day, and risk aversion has increased noticeably."
Another fear resurfaced this week: bird flu. The dollar rose against Asian currencies Wednesday after a World Health Organization report said an Indonesian man died of bird flu after caring for his infected son, raising the possibility of human-to-human transmission of the disease.
China's market, however, has been immune to the regional volatility, largely because foreign investors are restricted from direct dealings in most shares traded on the mainland. The benchmark Shanghai Composite Index is up 37 percent this year.
India's market plunge was exacerbated by short-term investors who had borrowed money to buy stocks, but then were forced to dump them to meet margin calls. If securities bought with borrowed money fall below a certain point, brokerages require investors to either deposit more money or sell some assets to meet the shortfall.
Indian Finance Minister P. Chidambaram said the central bank would ensure ample liquidity to help banks to help meet such margin requirements. Also, the stock exchanges agreed to cut margin requirements by almost half.
"We must accept the fact that markets will rise and markets will fall in response to developments," Chidambaram told Parliament Tuesday amid criticism from lawmakers that the government was doing little to shield small investors from the brunt of the stock plunge.
He attributed the past year's surge to the economy's strong growth potential luring foreign investors who have bought close to $15 billion in Indian shares since last April.
"The India growth story remains intact," he argued. India still remains "one of best performing emerging markets."
Even after the recent slide, India's Sensex index is still up 15 percent from Jan. 1.
Fidelity International, the world's largest mutual fund company, said in statement from their Bombay office that such market declines are "not unusual."
"While the Indian equity market may continue to be volatile in the short term, Fidelity remains positive on the long-term growth story," it said.
Meanwhile, many individual investors in India are hurting.
Parikshit Soni, a retired government employee in Bombay, has seen the value of his portfolio drop by hundreds of thousands of rupees (tens of thousands of dollars) in recent days.
"I worry about telling my wife about how much we've lost," said Soni, who had planned a vacation with his now-disappeared profits. "I don't think that's possible now."
Associated Press Writers Meraiah Foley in Sydney, Min Lee in Hong Kong, Gillian Wong in Singapore, Alex Nicholson in Moscow; Malcolm Foster in Bangkok and Ramola Talwar Badam in Bombay contributed to this report.
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