London funds managers cool on SE Asia

London funds managers cool on SE Asia

LONDON (Reuter): Shelter from Southeast Asian currency shocks will be hard to find after yesterday's steep drop in the Philippine peso, and London fund managers said they plan to give the region a wide berth.

Following Thailand's flotation of the baht, the peso was allowed to find its own level, immediately falling 11.5 percent against the dollar and is expected to open weaker still on Monday.

"It is a reaction to, and symptom of, what happened in Thailand. Traders are picking off apparently vulnerable markets," said Philip Ehrmann, head of global emerging markets at Gartmore Investment Management.

"The Philippines has a structural problem that needs to be addressed," said Charles Brock, who manages a Far East portfolio of US$2 billion for Foreign & Colonial Emerging Markets.

"It's not as severe as Thailand, which has a problem in the financial system in general, but (the Philippines) has a current account issue that must be solved," he said.

Brock is shy of committing funds to the region, he says, and views the recent appreciation of Thai shares as a selling opportunity.

Thailand's composite SET index has risen nearly 20 percent since the baht was devalued on July 2.

Brock says that Indonesia may offer the best prospects in the region.

"The currency may escape this but the stock market probably won't. Fundamentals stack up and it could be a buying opportunity if there is a spillover from the Philippines and Thailand," Brock added.

In the region, Ehrmann said: "There may be room for a degree of bottom fishing but we think it may be too early."

Dudley Lord, senior fund manager at Axa Equity & Law, says volatility will keep him underweight throughout the region.

Shares in Thailand and the Philippines that carry foreign- denominated debt are now virtually untouchable, fund managers say, because their interest carry will balloon with the fall in local currency.

Companies in food production and export industries may offer some scope for buying, fund managers say.

But overall sentiment is extremely negative.

"There is what amounts to a buyers' strike in Southeast Asia," said Ehrmann.

"It's like the contagion that occurred in Latin America, where Mexico collapsed and no one would touch Argentina, then no one would touch Brazil, Chile and Peru," he said.

Now that Philippine government resolve has crumpled, fund managers are expecting a showdown over the ringgit between currency speculators and Malaysia.

"The ringgit is going to be attacked. Fundamentals don't necessarily argue for Malaysia to devalue but currency markets have got it in their heads and they will try it out," said Brock.

"I suspect there is such bad feeling between speculators and (Malaysian central bank) Bank Negara that the speculators are going to want blood there too," said Simon Nicholson, a portfolio manager at Gartmore with $3.7 billion invested in the region.

"I think they will get it in the end but you are talking about a 5 percent devaluation rather 10 percent or 15 percent."

But Brock cautions that Malaysia has much bigger reserves and could bring in capital controls.