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