Since July, when the Philippines devalued its currency, Asian currencies have endured a brutal pounding, exacerbated by the Hong Kong stock-market bloodbath of October 28 and mounting evidence of Japan's banking-sector problems. Fearful of the risk of contagion, investors have been retreating from such places as Russia and Brazil where risks are particularly apparent. This has put stiff pressure on these countries' currencies.
"We're entering a risk-aversion phase with the focus on safety," says Avinash Persaud, chief currency strategist at JP Morgan in London. "This has been initiated by Asia and by the year-end wish to protect savings. As for the force of contagion, the greatest risk is now. We would tell investors to reduce exposure." He thinks it could be a year before investors in emerging markets feel courageous enough to return in force. For now, investors are still reeling from heavy declines in Asian currencies. Since the middle of last year, Indonesia's rupiah has fallen by 87%, the Korean won by 85%, the Thai baht by 63%, the Philippine peso by 34% and Malaysia's ringgit by 32%.
"Generally, many investors were lured to the emerging markets because they saw it as a good diversification, a little patch of nirvana," Persaud observes.