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.