Thailand's New Laws Could Spur ETF Panic

This is why so many of the ancient societies of Asia still have "emerging" markets. You're apt to wake up one morning to discover that Rufus T. Firefly -- the dictator played by Groucho Marx in the movie Duck Soup -- is in charge of the economy.

Witness Thailand, where the new government -- which seized power in a coup only a few months ago -- plunged its country's financial markets into chaos earlier Tuesday by slapping hefty penalties on foreign investors.

The Bangkok stock exchange plunged 15% on the news, after earlier falling as much as 20%, while the aftershocks spread across other emerging markets.

Foreign investors in Thailand yanked $699 million out of the country's stock market in a day, according to official figures reported by Bloomberg.

Oftentimes a financial panic in Asia is a short-lived affair, but this is a Christmas gift that could keep on ... taking.

Thailand's new laws, which were designed to cool speculation in the stock market, are likely to force a lot of fund managers to withdraw their money in panic instead. And you can bet some hedge funds are going to get caught out and be forced to sell as well.

"I very much doubt this is going to be over in 24 hours," says international strategist David Bowers, the head of the London-based investment consultancy Absolute Strategy. "And with the Thai market down so far, you know somebody got hurt."

The danger probably doesn't lie in other countries copying Thailand's move. It has already proved a disastrous blunder. The danger lies in a vicious circle. Fearful foreign investors pull out, markets fall, so more foreign investors are panicked into selling out.

There are fears of a redemption stampede among investors in open-ended U.S. mutual funds and exchange-traded funds that have invested in emerging markets, as Mark Mobius, who overseas $30 billion at Templeton Asset Management, told Bloomberg News earlier Tuesday.

Mutual Funds With More Than 7% of Assets in Thailand
Fund Name	Ticker	Thailand Exposure	TSC Rating
The Thai Capital Fund	TF	100%	C
Thai Fund	TTF	100%	E
Guinness Atkinson Funds - Asia Pacific Div Fund	GAADX	17.67%	Unrated
Eaton Vance Asian Small Cos Fund	EVASX	15.14%	C
Eaton Vance Emerging Markets Fund	ETEMX	15.04%	B-
Utopia Growth Fund	UTGRX	9.04%	Unrated
Templeton Global Bond Fund	TPINX	7.22%	C+
Utopia Core Fund	UTCRX	7.20%	Unrated
Source: Bloomberg

As it happens, Thailand is a tiny market even in the "emerging" sector, and there are no U.S. open-end mutual funds or exchange-traded funds, like iShares, that invest in that country alone. It's going to take time to see the effect on broader emerging-market funds, but this is probably a good time to lighten your exposure.