Source: Forbes.com

by Drobny Global Advisors

The imposition and subsequent removal of capital controls in Thailand last week was a stark reminder of the risks inherent to investing in emerging markets. The episode illustrated the importance of understanding the global macro picture associated with international equity positions. (Thai closed-end funds include the Thai Fund and the Thai Capital Fund. The one-day 14% decline in Thai stocks (and subsequent 11% recovery the following day) demonstrated the significance of foreign investment flows in emerging market equities, especially in today’s liquidity-driven investment environment.

India

India has been one of the biggest beneficiaries of foreign investment flows, receiving an estimated 25% of total portfolio flows into emerging markets. According to Morgan Stanley, in the three years through 2005, non-foreign direct investment flows accounted for 83% of total capital flows in India, compared with an average of only 32% for a basket of other top emerging markets, including Russia, Mexico, Turkey and China. This is a staggering piece of data, because unlike Foreign Direct Investment flows, portfolio flows can--and often do--reverse suddenly and without warning. Liquidating a factory that one has built in India cannot be accomplished overnight, but all it takes for an investor to liquidate Indian stocks is a few clicks of the mouse.

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Posted by pichu at December 26, 2006 1:18 PM