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World: The Roots Of Stock Market Turmoil

Washington, 29 October 1997 (RFE/RL) - There are as many explanations of what has been happening in the world's stock exchanges over the past few days as there are people willing to hazard a guess.

But in the end, it always comes back to remembering that any market is a place where human beings buy and sell things and that makes them vulnerable to all the vagaries of the human condition.

The common view is that the world-wide drop in stock prices was triggered by a rapid fall in prices on the Hong Kong exchange last week. That quick decline was blamed on recent turmoil in southeast Asia where countries like Thailand, Indonesia and Malaysia found their currencies under attack due to domestic economic imbalances.

In Thailand, which started the chain reaction two months ago, the problem was excessive foreign investment pouring into a real estate market that was vastly overpriced. The collapse of the high-flying Thai real estate sector left building owners with mortgages higher than the value of their structures and few renters willing to fill the vacant buildings. That domestic turmoil prompted currency traders to discount the value of the Thai bat and despite an international rescue effort, currencies in a number of countries in the region came under attack as over-valued.

Many analysts say that as international experts began lowering the projected growth rates of these once roaring Asian "tiger" economies, it became the conventional wisdom that the days of endless economic growth in Southeast Asia were over. It was that "wisdom" which led investors to begin wondering if regional stocks were going to lose value. That triggered the sudden decline in Hong Kong.

The rest is history as investors around the world began wondering about the economic health of the southeast Asian region and questioned if it would continue to be a strong market. Those kinds of questions prompt investors to sell shares which may not be as valuable in future days and a rush of those can send a market into a spiral.

There were difficulties in Thailand and several of the Southeast Asian nations. But the World Bank's Chief Economist, Joseph Stiglitz says they were dealing with their problems and overall had "very strong economies," including unusually high savings rates.

Still, stock markets saw dramatic drops in prices. And because stock markets have been enjoying a long, almost unbroken run-up in prices, experts have long been saying that the markets are due for a correction -- a readjustment of prices to better reflect underlying values.

That set off a domino effect of sorts as investors in one market after another saw the drop in another market and began selling to beat the price decline. Falls of seven to ten per cent were recorded in Paris, Frankfurt, Tokyo, London and New York. Declines of up to 20 percent were seen in Moscow and other cities where stock markets are still brand-new, small and struggling to find their place. Panic selling is usually worse on inexperienced markets, but in fact when a decline begins the reaction everywhere has little to do with the popular reasons given.

Experts say it is pure survival instinct which prompts anyone who may have recently paid a historically high price for a stock to want to sell it quickly when prices begin to drop.

No one wants to be left holding a stock whose price has fallen far below what they just paid for it, even if intending to keep it long enough to grow back in price. One feels bad after paying top price for a head of cabbage at a market just before a fresh supply prompts prices to drop dramatically. But at least the food item can be eaten. A stock is of value because it represents the expectation that in the future the firm will continue to pay dividends or increase in value through its production and sale of products or services.

Even then, so many factors enter into the equation that it is impossible to assign a single cause to either sudden drops or sudden rises in stock prices.

While many investors were selling into the falling market Monday, it was little noticed that there were buyers snapping up those stocks. They were looking for bargains and the sudden turn around in New York -- from a 554 point fall on Monday to a 338 point rise on Tuesday -- was directly attributed to investors anxious to buy stocks at lower prices.

A number of major corporations, in fact, had begun to take advantage of the dramatic drop on Monday to buy back large blocks of their own stock at bargain prices. The computer giant IBM was among firms which revealed they were using the sudden drop as a great opportunity to reduce the number of ownership shares on the market.

The problem for emerging stock markets, like those in Central and East Europe and Central Asia is that their very small size -- and inexperienced investors -- leave them far more vulnerable to dramatic shifts in investor confidence. Still, experts say that while it may take longer, these markets too will see a rebound of prices over the long-term. In the end and over time, they say, those markets will reflect the underlying strength of their national and regional economies.