wealth builder
Thai financial institutions have little exposure to the financial subprime crisis
SUTHEE LUANGARAMKUL
The current financial mess is considered the biggest world crisis since the Great Depression. The story started from gigantic write-down from mortgage loans in big financial institutions in 2007. The impaired quality of loans hurt balance sheets of financial institutions and the worst case resulted in declaration of bankruptcy.
On February 17, the first victim of the crisis was the nationalisation of the UK bank Northern Rock for its fund crisis; while on March 16, Bear Stearns was sold to US investment bank JP Morgan Chase. On July 13, the US Treasury and Federal Reserve decided to nationalise one of the biggest mortgage finance companies Fannie Maw and Freddie Mac.
However, the global market has shocked and made the worst day of Wall Street since September 9, 2001 attacks after Lehman Brothers filed for bankruptcy, Merrill Lynch was taken over by Bank of America and the US Federal Reserve Bank announced a rescue loans of $85 billion for American International Group (AIG) in exchange for an 80 per cent stake.
Recently, the news of a closedown of the US' biggest bank Washington Mutual also made the headlines. This is the subprime credit crunch in the line. Even the market witnessed the meltdown of US financial institutions from subprime mortgage, but it seems that the pace of negative development is accelerating as distressed financial companies are being nationalised in Europe.
What will happen next? No one knows who's next in line. Of course, another emergency bank merger in the US is expected, while the government in Europe is willing to take action to intervene with the troubled banks.
How will Thailand be impacted? Positively, Thai financial institutions have little exposure to the financial subprime crisis due to limited investments in subprime related collateralised debt obligations (CDOs). There are a number of indirect effects from financial loss. The obvious impact is a sharp consolidation for stock market due to loss foreign investors' confidence, foreign investment's net sales of 121,861.29 baht a year to date and the SET has lost 30.48 per cent since the end of last year.
Slower economic growth in the US and EU could deter demand for Thai exports and in turn could hold back Thai economic growth.
Listed above is the average performances of different types of funds in Thailand including bond, equity, mixed, money and other types of funds.
The strategy to invest under high market uncertainty, especially for naive investors who lack experience and have no opportunities is to invest in safe assets like money market funds or high quality fixed-income funds like government bond funds.
This strategy is appropriate for risk-averse investors. For risk-tolerant investors, they can invest in gold, which is sometimes perceived as a hedging instrument against inflation, recession and the weakening dollar.
With the on-going financial crisis and more possible failures of financial institutions in the US or Europe, market correction will continue. Thus, diversifying investment into gold could trim down exposure to the stock market and unnecessary high risks.
The timing of "buy" and "sell" is important.
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