Introduction

Investors have done very nicely from emerging market exposures over the past year or two. So-called Bric baskets - Brazil, Russia, India and China - have proved popular with institutional, high-net-worth and even retail investors keen to take exposure to high-growth, high-yield markets.

But two key events last year have served as a sharp reminder that emerging markets aren't just one-way, money-spinning investments. First, there was the military coup in Thailand on September 19. In fact, the financial markets responded fairly positively, as it was seen as ending the uncertainty surrounding former prime minister Thaksin Shinawatra's rule. However, botched currency controls implemented by the Thai central bank in December demonstrate that emerging markets can still throw up nasty surprises.

The controls effectively imposed a 10% withholding tax on short- term capital inflows - an attempt by the central bank to stem the rapid appreciation of the baht. However, after a 15% fall in the Thai stock market on December 19 - the day the rule was implemented - the government was forced to backtrack, declaring that the measures would not apply to equity investors.

It seems pretty much everyone except Thailand's policy-makers was able to predict the consequences of the currency controls. The measures appear ill-thought-out and ill-conceived. Yes, the controls (which still remain for the debt market) may end up slowing the baht's appreciation - although there has been little evidence of that so far - but at the cost of scaring away much-needed foreign investment.

Nick Sawyer, Editor.