Now in September the professional investment managers are pondering what happens next. Is the entire concept of emerging market investment gravely damaged and should there be a flight to the supposed safety of more established markets? Or will people distinguish between the various regions more and more, switching from East Asia to other areas like Latin America and Eastern Europe?
It is really too early to try to answer that question because the East Asian markets and currencies have yet to settle down. Still, there are a couple of early pointers to the direction that investment flows will take in the coming months, three of which deserve further attention.
The first of these is the increasingly clear distinction being made between the economic policies of different East Asian countries. One of the most alarming features of the markets during August was the systemic nature of the collapse: fundamentally sound currencies (like the Hong Kong dollar) were hit along with Indonesian rupiah and the Malaysian ringgitt. Now, gradually, an element of order is returning. A clear distinction is being made between countries whose governments have acknowledged past misjudgments and are starting to correct them (like Indonesia), those that keep on making policy errors (like Thailand), and those whose most obvious response is to blame everyone else (like Malaysia).
This discrimination is much more healthy than blanket condemnation. Ultimately what matters in determining the price of equities is the financial performance of the companies whose shares are being traded; and that performance is influenced profoundly by the quality of economic management of the countries in which they are based. Discrimination is all; systemic share price movements are irrational and destructive.
The second pointer is that the flight from East Asian equities has not meant a flight from the area altogether, for much of the money seems to be switching into local bonds. Currencies are starting to calm and while it will be many months before confidence is rebuilt, at least they offer clear value. James Capel's emerging market team notes that some Asian currencies are overshooting their equilibrium levels, which in theory ought to offer buying opportunities.
Some of these buying opportunities will be in local bonds. The inevitable policy response to a crisis of overheating is a squeeze on public spending, as is happening for example in Malaysia. Anything which reduces pressure on the capital market, like cuts in public spending, makes fixed interest investments more attractive. It follows once East Asian currencies are perceived to have bottomed out, bonds will be the principal beneficiary.
The third pointer is the fact that there has been virtually no fall-out beyond the East Asian region. More than this, the demotion of the previous generation of stars has encouraged a hunt for new ones. BNP, which has recently established a unit looking at investments on the fringe markets, is promoting investment in a number of East European markets: the equities of Bulgaria, Serbia and Croatia, treasury bills in Ukraine and Romania, and municipal paper in Russia.
The upgrading of Eastern Europe and the return to fashion of Latin America have been two of the features noted in a new study by American Express Bank's economics team. It has calculated a "tiger index" which scores different countries' quality of economic policy-making and performance; the top 20 and the bottom five are shown on the chart. As you can see the "conventional" tigers, all in East Asia, still come out top despite the recent hiccups. But there are some interesting other countries creeping up the league. The Czech Republic and Poland are there; so are Argentina and Chile; even Russia just creeps in. Amex notes that the East Asian countries have not in general improved their scores over the last 10 years, while countries in Latin America and Eastern Europe have done so.
Of course anyone wanting to invest in Russia must be aware of the risks involved. But the value is stunning. The whole Russian market is capitalised at $39bn. That is a bit more than the market capitalisation of Barclays Bank, but much less than HSBC and Lloyds. Rationally, should the entire commerce and industry of Russia be worth the same as that of our third largest bank? The potential is obvious: Russia does not need to do very well to do a whole lot better.
A further small boost to Russian investment will come from its inclusion in the index of emerging markets run by the World Bank affiliate, the IFC, along with Israel, Egypt, Morocco and Slovakia. Being included in an index of itself means little - except that it shows that the world investment community is takingthese countries seriously.
Of course things can still fall apart in Russia as anywhere else. The disruption of East Asia could still spread to the other time zones. But each day that passes makes this less likely. Accordingly it seems sensible to expect the emerging markets of the American and European time-zones to receive much more attention from investors in the months to come. At some stage the hunt for more and more outlandish countries will reach its natural conclusion.
But there is momentum in the quest for value in hitherto untrodden ground. Who would have thought, five years ago, that a large investment bank would be urging its customers to consider buying Ukrainian treasury bills?