It's hard to get off the back of the US tiger

WHEN the US stock market sneezes, the rest of the world catches a cold. So vulnerable is the Thai stock market to this modern axiom that it gets sick every time, more so than other markets. When the Dow Jones Industrial Average plummets, so does the SET. And it is the last to rally when New York recovers. You would normally expect Thai investors to act a bit more rationally to the caprices of US markets. But that is not the case, so strong is their herd instinct.

But don't blame the Thais alone. Around the rest of Asia, investors are no better when confronted by the percussive forces from the US, the all-powerful global financial centre. Just look at the period between Jan 3 and 7 when the global markets reacted so nervously following the big sell-offs at Dow Jones and the Nasdaq. Concern over the potential rise of US short-term interest rates, the upward movement of bond rates and profit-taking in high-tech stocks led to the sharp decline of the US markets. Between Dec 30 and Jan 7, the Dow Jones, which gained 25 per cent in 1999, declined by 2.12 per cent.

But elsewhere it was a blood bath. The Hong Kong's Hang Seng index, during the same period, shed 9.59 per cent, compared with the Thai stock market's 7.84 per cent, the Korean market's 7.67 per cent, the Strait Times index's 4.48 per cent and the Manila market's 2.27 per cent.

''The graph shows that they all moved in the same pattern, from the Hong Kong, Korea, Philippines and Singapore markets to the Thai market,'' says Dr Prasarn Trairatvorakul, the newly appointed secretary-general of the Securities and Exchange Commission.

Prasarn and his SEC officials monitored the event closely as the new millennium unfolded. They found that over the four-day trading period, foreign investors accounted for only 10 per cent of the total volume in the Thai market. ''But this 10 per cent dominated the market because the power of psychology was very influential,'' he adds.

The decisions by Thai and other Asian investors were virtually guided by signals in the US markets. At no other time in history has a financial centre so dominated the world in the same way and on the same scale as New York is now doing. As a financial centre, it holds the rest of the world at bay by its sheer size and financial power, not to mention the technological prowess of the US economy. It dictates the movement of capital flows right around the world, causing perpetual global stock-market turbulence.

The question is, how can a small country like Thailand protect itself from this dangerous force of market globalisation, for stock-exchange movements have profound implications for a country's economic health. If stock prices fall sharply, companies can't raise money by issuing equity. Then, what equity there is carries less value when placed as collateral at banks, resulting in a deterioration of the asset quality of the banks. Without money, companies cannot expand their businesses or hire more people. Without business expansion or rising employment, the economy cannot grow.

Unfortunately it is impossible for Thailand to insulate itself from the impact of this globalisation of the financial markets. Shutting down the borders is not the solution, even if you are tempted to do so. But there are a number of other ways in which the Thai market can be shielded from external shocks. The Thai market is small, being equal to only 50 per cent of gross domestic product. Growing it to more than 100 per cent of the GDP value will strengthen the market and result in less volatility. Adding more supply to the market will also help. At the moment, bank stocks dominate the Thai market, but if more state enterprises are listed, that will help to cushion the volatility.

Looking ahead, the country will have to be more prepared for the force of globalisation. Stock-market turbulence, triggered by the unpredictable movement of massive capital flows, will become even more a normal feature of daily trading. Meanwhile, technological innovation will continue to lead the world to new frontiers. Are we ready for that?

BY THANONG KHANTHONG