Monday, March 27, 2006
recent weeks, however, have seen the bubble burst, with the saudi market -- the region's largest -- losing a third of its capitalization.
Analysts say the selloff in the Gulf shows few signs of spilling over broadly to other developing countries -- as happened in 1997 when a currency crisis in Thailand sparked broad losses throughout Asia, or when Russia's debt default the following year roiled global markets -- because few investors outside the Gulf own its stocks.with emerging market debt spreads near rock bottom, an expansion of risk premiums could emerge with lightning speed. it matters that the mideast markets are thinly traded by westerners -- but it also matters that some of the largest private investors in the west are middle easterners rich with oil revenues. even if these parties are not brought to margin calls and forced liquidations by virtue of wide diversification, the experience is likely to make them more risk averse in coming months and potentially liquidate some global positions to raise defenses.
... A few of the top-performing, but more volatile, emerging markets, such as Turkey or Brazil, are seeing signs that global investors are lightening up on their holdings. Their benchmark indexes have fallen by more than 5% this month. "It's a warning sign that people are worried about risk," said Arjun Divecha, a fund manager with GMO Emerging Markets in Berkeley, California.
there's also the prospect of social unrest in the mideast, where small investors are a new phenomena that accompanied the market bubble and a booming local oil-based economy. literally millions have been hurt, and many leveraged parties wiped out entirely by the vicissitude of capital markets. large protests by devastated household investors have already taken place in kuwait, and the government has intervened in the market there.
watch in coming weeks for signs of retrenchment in emerging markets. contagion is a tricky thing, and markets certainly autocorrelate in times of rising volatility. after years of expansion and easy money, the widespread complacency of global investors could quickly and perilously be undone.