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Far East market shockwaves reverberate around the world

The shockwaves from the sell-off in South-east Asian stock markets continued to hit share prices across the region yesterday, sending ripples round the world. With the ban on "short selling" imposed by Malaysia limiting the damage there, Indonesia bore the brunt of investors' nervousness in the wake of signs of economic weakness and currency instability. The Jakarta index plunged 6.9 per cent, its worst fall for eight years, as the Indonesian rupiah, along with most of the other major currencies in the region, registered further falls against the dollar. The Philippine peso and the Thai baht fell close to record lows against the US currency, while the Malaysian ringgit ended at its lowest level for about 26 years.

Hong Kong and Singapore, two markets often seen as safer havens in times of trouble in the area, provided little immunity yesterday. The former colony's Hang Seng index slid 740.85 points to 14,135.25, its lowest point since last month's hand-over the China, bringing the two-day fall to over 9 per cent. In Singapore, the benchmark Straits Times Industrials Index recorded a 2.2 per cent slump yesterday.

Meanwhile, in Tokyo, the Nikkei 225 index closed at 18,229.42, down 222.03 points.

Western markets were again buffeted by the typhoon raging in the Far East, with London's FTSE 100 index down over 60 points at one stage and Wall Street 87 points lower on the Dow Jones index in early trading. However, both markets clawed back the earlier losses, with the Footsie managing to stay above the key 4,800 barrier, closing 27.9 points off at 4,817.5. French and German markets were also caught up in the storm, while Mexico, whose economic problems triggered the last big sell-off in developing markets, also opened lower, hit by Far Eastern fears. The leading IPC index opened 1.66 per cent down, after a 2.5 per cent fall the previous day.

Mahathir Mohamed, the Malaysian prime minister, did nothing to allay the fears of Western investors after commenting that the restrictions on short selling - the disposal of shares not actually owned by the seller in the hope of buying them back at a cheaper price - would remain in place until the market recovered to 1,000 points on the composite index. Yesterday, the index fell another 1.01 points to 811.17, after signs of local institutional buying towards the end of the trading session helped to trim earlier losses. The prime minister was also reported as saying that Malaysia may have recorded a trade deficit for the month of July.

Edward Goodchild, a fund manager at the London-based Foreign & Colonial investment managers, said Malaysia's action on short selling had de facto closed the market to most US and UK investors. The system of "free and free" settlement adopted by Malaysia meant shares or cash had to be deposited with a local broker before a sale or purchase of stock could be effected. This increased the risks for foreign institutions and most pension fund and other trustees demanded that no shares or money be handed over until a deal was done, known as "delivery versus payment".

This effective closure of the market "keeps the stock market index up, but doesn't stop selling pressure building up, just the ability to enact it", he said.

Local market players echoed these thoughts. David Lum of Nava Securities in Singapore said: "There is an overall disillusionment with the structure of South-east Asia markets. The integrity of the markets isn't what it was thought to be."

London fund managers suggested that the events in the Far East could make Western investors more reluctant to invest in emerging markets. "The tolerance for taking risks by major investors has reduced", according to Michael Hughes, global strategist at BZW in London. "They are not in any rush to take advantage of what might be seen to be cheap valuations on the back of the shake-out."

Mr Hughes said the events in the Far East a poorer global liquidity were pushing investors into cash and the safer waters of the US bond market.

Matthew Merritt, emerging market strategist at ING Barings, agreed that cash was set to become a more popular investment for institutions. "Given the uncomfortable global backdrop of developed markets under pressure, the first port of call is into cash", he said.

Others suggested Hong Kong could now be the most vulnerable market in the south-east Asian region, given the threat that the need for higher interest rates there could put at risk the recovery in property prices.

Yesterday, the Hong Kong government was attempting to allay fears that the stock market crisis could spill over into the economy as it published a maintained growth forecast of 5.5 per cent of gross domestic product for 1997. Government economist KY Tang claimed that the area's "economic fundamentals are good" despite recent fluctuations in the stock market. He added that the market's movement did not yet signify a setback to consumer sentiment.

Comment, page 19,

Market report, page 20