We may not be immune to this market contagion
Saturday 30 August 1997
Is this fair comment, or are we all being just a little bit complacent? My own view is that this is a much more serious crisis than any of us could have imagined a few weeks back, and that there is now a real danger of spillover into other markets and economies. I'm not saying that this is what will actually happen. The Mexican crisis of three years ago looked considerably worse at the time than this one does now, if only because the US economy was more intimately linked with that of Mexico than with the Pacific rim. However, the long term effects of the Mexican collapse seem to have been marginal.
There are some very good reasons for believing the same will be true of the latest wobble from the developing world. The tiger economies of South-east Asia are in my view much over-rated, their apparent achievements generating more publicity than they deserve. Why it is that so many western leaders, Tony Blair among them, seem to stand in awe of these countries is a persistent source of mystery to me. Our politicians are much too ready to ask: "Why can't we be like that?" Perhaps it's a cultural thing, but personally I'd much rather not have their command style of economic and workplace management.
Now undoubtedly these economies have shown some impressive growth rates in recent years. No quarrel there, even though it now appears that this has been achieved partly on the back of a dangerous speculative bubble. But they are actually not that big and GDP per head of population is still low in most of them by western standards. Even if they were to be wiped off the face of the earth, the impact on world trade would not be hugely significant.
For all that, containment may not be so easy this time round. Here's why. Small though they may be, these economies have been important export markets for more developed countries, particularly Japan, 40 per cent of whose exports are within the Asian continent. An awful lot of sizeable international companies will be badly affected by the collapse of these economies. Three of the constituents of our own FTSE 100 share index - HSBC, Standard Chartered and Cable & Wireless - depend crucially on the region for their wellbeing.
The grandiose public spending projects which have stoked the region's boom and helped sustain Japanese and other exporters are now a thing of the past. Growth rates, which have been running at 7 per cent and more in some parts of the region, are set to slow to near recessionary levels. More worrying still, however, is the effect on the international banking community. Japan's already over-stretched banks are highly exposed to the region's property boom, particularly in Hong Kong and Kuala Lumpur. There's growing evidence that bank lending has helped fund the stock market boom as well.
One of the better rumours doing the rounds yesterday was that the reason Malaysia cancelled short selling was because so many of its politicians and leading businessmen have used sky-high equity values as collateral for further investment in the stock market and property. Just a rumour, but eminently believable, and if true a clear signal that there is much worse to come in these markets. All the ingredients are there for what happened to the Japanese stock market in the early 1990s. Speculative boom followed by spectacular bust. I don't want to frighten any of you Far Eastern investors out there, but the Japanese market has yet to show any sign of recovering.
The real test is going to be Hong Kong, by far the largest stock market in the region outside Japan and also its most liquid. As such it has already been badly hit by the problems in Thailand and Malaysia. The natural tendency of foreign investors, now desperate to reduce their exposure to the region and unable to sell down their holdings in the smaller markets, is to sell Hong Kong, which is precisely what they are doing. Thus does the contagion spread between markets.
For Hong Kong, the effects of continuing to defend the US dollar parity of its currency might be as bad as giving into the hedge funds and speculators and abandoning the link, as others in the region have done. When all others around you are devaluing, sticking to a fixed exchange rate usually carries a heavy economic cost.
The whole region, then, not just its more speculative fringes, could be in for a prolonged period of austerity. At this stage it seems unlikely that this of itself will be enough to cause the long-expected correction on Wall Street. However, the speculative stock market boom of Thailand and other Asian markets holds some parallels with what has been happening on Wall Street. It could be that in the problems of the Far East we are seeing a harbinger of things to come in our own markets.
Ephraim Margulies, former chairman of the S&W Berisford commodity trading empire, died sometime recently in relative obscurity. Secretive to the last, his death went unreported in Britain until this week, and even then it was actually quite difficult to establish that he actually was dead.
I only met Mr Margulies once, and I have to admit to taking rather a liking to the old rogue. He was the very charactacture of the emigre, self made businessman. Once asked what his business philosophy was, he said in his thick eastern European accent: "We buy a little, we sell a little, and with God's help we make a little." I haven't made this up, I kid you not. He really did say it. He was also as bent as a nine bob note. The City always suspected it, and in the Guinness affair it was finally confirmed. Mr Margulies was the fifth man in the scandal, but for reasons that are still hard to fathom he was never charged. Why it was that Mr Margulies escaped, when Gerald Ronson was jailed for similar participation, remains a mystery.
The most intriguing explanation of this is that "Marg", as he was known, was protected because of his MI6 connections. It was said that his trading interests in eastern Europe acted as a conduit for British intelligence, that he knew too much and threatened to spill the beans if the police touched him.
Regrettably, the real explanation is probably a rather less exciting and sinister one. It was that there really wasn't a great deal of evidence to link Mr Margulies directly to the conspiracy, other than the word of his stockbroker, Tony Parnes. Since Mr Parnes was himself a defendant, the laws of criminal justice dictated that he could not be used as a witness against Mr Margulies. Still, claims that Mr Margulies threatened Mr Parnes and tried to involve him in a cover-up made some good headlines during the trial, and Marg's name was damned as effectively as if he had actually been in the dock.
Amazingly, he continued to hold on at Berisford, which while he was there was run like a family fiefdom. It wasn't the Guinness revelations which finished him off, but disastrous losses on some Manhattan property developments. Marg was finally forced out, all his previous achievements forgotten in the nemesis of his demise. He retreated into the haven of his ultra-orthodox Jewish beliefs, never to emerge on the public scene again.
There's no getting away from it though. He had a certain ability. After his name emerged as a player in the Guinness shares fraud, he made a great show of handing back some of his ill-gotten gains by writing out a cheque for pounds 2.4m over lunch with Sir Norman Macfarlane, then caretaker chairman of Guinness. What is not generally known is that he also emerged from the lunch with a pounds 3m contract to help Guinness with its foreign exchange problems in Nigeria. Who said that fraud never pays?
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