Asian Sovereign Funds May Support Stocks

Many Asian stock indices are deep underwater this year. The MSCI Asia Pacific Index, for example, is down 13% since January 1, and there’s a good chance it will drift lower. In Taiwan, the local market hit a five-month low last week. Vietnam’s local market (yeah, sure they’re communists – Ho Chi Minh would roll over in his grave) has lost over 60% when inflation is factored in. Pakistan’s Karachi Stock Exchange Index is off by a third since April. But if one listens carefully, one might hear the cavalry coming to the rescue in the form of sovereign funds.

None of these governments has acted yet. However, the cabinet in Taipei has asked the government’s pension and insurance funds to buy local equities. The National Stabilization Fund (worth T$500 billion, US$16.4 billion) hasn’t yet been unleashed, but its board meets again on Friday. Vietnam’s government is setting up a stabilization fund despite ideological conflicts. And Pakistan’s fund is getting pressure from both the government and the military to use some of its Rp30 billion (US$440 million).

Naturally, this would be a good thing for the local stock markets. A huge and lumpy increase in demand for stocks would force prices up. People who want out of a position could get out, while those who bought recently would have a nice profit for the books. The taxpayer, though, would effectively be bailing out those who invested foolishly, thus creating moral hazard issues.

In 1988, as the dust was settling in the Asian currency crisis, Hong Kong’s government bought shares to keep up the value of assets denominated in HK dollars. In 1991, Japan’s government intervened after the Nikkei fell by 50%. Both fixes worked, at least in the short-to-medium term.

Interviewed by the Financial Times, Khiem Do, who heads up Baring Asset Management’s multi-asset operation in Hong Kong, said that any official action succeeds or fails based solely on the price levels – the lower prices are the more effective intervention is. He said, “The price-earnings ratio has ideally to be below 10 times, or no higher than the mid-teens.” At present, Taiwan is trading at 11 times forecast profits, Vietnam at about 10, and Pakistan at 14. It may be wise to wait a bit longer, despite the pain.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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