Asian nations may buy shares to aid sagging markets

By Andrew Wood, Kathrin Hille, and Farhan Bokhari
Financial Times, London
Sunday, June 29, 2008

http://www.ft.com/cms/s/0/f0e5ac24-4606-11dd-9009-0000779fd2ac.html

Several Asian countries are looking at spending billions of dollars on shares to support plunging stock markets in a move likely to be welcomed by global investors who fear that emerging markets may be about to suffer further dramatic falls.

The development follows a 13 per cent fall this year in the MSCI Asia Pacific index, which looks as though it will end the month on Monday with its worst first-half performance since 1992, when it sank by 23 per cent as the Japanese economic bubble deflated.

Government officials in Taipei, where the local market dropped to a five-month low on Friday, said the cabinet had called on government pension and insurance funds to buy more domestic shares and to hold their investments for a longer period.

Economic and financial ministers and central bank officials met over the weekend to discuss how to boost investor confidence.

They stopped short, for now, of ordering the use of a T$500 billion ($16.4 billion) National Stabilisation Fund designed to support markets in times of volatility caused by non-economic events. However, the board of the fund, which was last used during political turmoil after the 2004 presidential election, will meet again on Friday.

In Vietnam, state media reported that the stock exchange and securities regulator was setting up a stabilisation fund to support a market that has lost nearly two-thirds of its value this year as inflation surged.

And in Pakistan, the Karachi Stock Exchange is coming under increasing pressure to use a 30 billion Pakistani rupees ($442 million) stabilisation fund set up last week for use in "volatile circumstances."

Karachi had one of the hottest stock markets in the world in 2007, but its loss of nearly one third in value since April has created "systemic risk," the KSE said.

Official intervention to support share prices has a long history in Asia. One of the most successful examples was in 1998, when the Hong Kong government bought shares in the aftermath of the Asian financial crisis to support the value of the assets backing the territory's currency, which is pegged to the dollar.

Japan started to intervene in the stock market in 1991 after prices halved after the "bubble economy" burst. Interventions continued for several years, but more than a decade later the Nikkei average is only worth a third of its value in 1989.

The success of official support "depends on one thing only: how cheap the market is," said Khiem Do, head of multi-asset at Baring Asset Management in Hong Kong. "The price-earnings ratio has ideally to be below 10 times, or no higher than the mid-teens, and then you have some chance of it working."

Taiwan is currently trading at about 11 times forecast profits, Pakistan at 14, and Vietnam at about 10, he said.

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