Thailand has its tiger teeth pulled

Not many of us were glued to the television and radio on Sunday waiting to hear if Chuan Leekpai's Democrats had won the general election. The election in Thailand, that is. But at least one group of people was watching and listening carefully as the results came in: analysts and fund managers who invest in Asian stock markets.

Like the business community in Thailand itself, investors were hoping that Chuan Leekpai would win, regarding him as more likely to be able to revive the country's flagging economy. In the event they were disappointed, as the New Aspiration party and its coalition partners won by a small majority.

Since this is essentially the same team as the last government - which collapsed amid allegations of sleaze and financial mis-management - it looks as though there will be little change in the political and economic outlook, and the Bangkok stock market fell sharply on the news.

Many funds had already reduced their holdings in Thai stocks, according to Matthew Barrett at Newport Capital, a specialist emerging markets fund manager. Although shares are now looking cheap, he says many companies are highly geared (have high borrowings relative to their capital) and this, combined with the political outlook, makes the Bangkok stock market less attractive to investors than others in the region.

In themselves the uncertainties in Thailand will not have a big impact on the performance of most "tiger" funds; typically such funds will have less than 10 per cent of their money invested in the Bangkok stock market. But they do indicate the extent to which political considerations weigh heavily in the Far East, and nowhere is this more true than in Hong Kong, with the British withdrawal now less than a year away.

Inevitably, headlines here in Britain have focused on concerns for democracy and human rights following the handover to Peking rule - but from an investment point of view it is a different story. Fund managers are increasingly overweight in Hong Kong - in other words they are increasing the proportion of funds invested there.

Nerissa Lee, who manages Guinness Flight's Asian smaller companies and China funds, is herself Hong Kong Chinese and can see both sides of the picture. "People aren't exactly cheerful about the transfer of power," she says, but they are pragmatic. They want to better their lot - and value this more than freedom of expression. Democratic values will become more important in time but, for the moment, catching up with living standards taken for granted in the West is the overriding objective of the majority of Chinese.

"Another dimension which is often overlooked by westerners is the strong bond that the Chinese, even overseas Chinese, still feel towards their motherland and Chinese culture. There is a genuine desire on the parts of both Hong Kong and mainland Chinese to continue Hong Kong's success. Both want it to play an even more important role in the modernisation and transformation of the Chinese economy."

Matthew Barrett puts it more simply: "If the Hong Kong stock market were to take a dive after the handover, that would be a massive loss of `face' for the government in Peking. They are determined to show the world that they can run Hong Kong better than the British did"