To wit.
Foreign investment usually requires TWO asset purchases. FIRST the currency, THEN the hard asset (stock, etc.).
If I have $1000 at par with 100,000 Baht, and I buy stock in Thailand, my situation is:
100,000B in stock at $1000.
If the stock heads south, say, 20%, my situation is:
80,000B in stock at $800, ASSUMING the baht is stable. BUT IF THE BAHT ALSO DECLINES 50%, my situation is:
80,000B in stock which to sell I must exchange, gaining a value of $400.
A closed-end bond fund eliminates the currency uncertainty. I can trade directly in the stock, in dollars, without going through a currency conversion. I do not need the intervening asset, the Baht, to make trades, and this eliminates to some extent the currency problem. Thus if what I am interested in is the asset peformance without reference to trasnitory currency problems (which all multinationals are familiar with), I can have a 20% increase or decrease in the Baht-denominated performance without having the whole thing bollixed up by exchange confusions. It reduces currency downside and upside risk, because by trading botches of Baht physical capital in dollar denominations we can be less wary about the effects of currency traders.
Thus it makes sense to me that the Asian funds are trading at a premium. Not because they are bubble prone--they are all down 30-50% (in dollars) for the year and have been punctured hard--but because in effect it is possible to put a valuation on the asset while separating the currency issue. In other words, capital still needs hardworking starvlings to produce stuff, no matter what the traders think, and that gives value to the underlying assets. For closed-ends to trade at a premium is probably not an indciator of stupidity, but rather a pretty good quantification of how much the current problems in Asia reflect not "fundamentals" but the deleterious effects of currency speculators.
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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