Investors 'must hedge' against forex risks

An economist at Kasikornbank advises investors to take more hedging positions against foreign-exchange risks arising from the European financial markets, in case panic over likely asset sales causes drastic volatility in capital movement.

The next likely players in Europe's sovereign debt crisis are Portugal and Italy, after Greece, which is struggling for a ¤130-billion (Bt4 trillion) bail-out with time running out to avoid a default.

"If there is a contagion effect in the euro area, there may be a lot of capital movement. Investors will likely prefer holding cash and selling their assets," said Kobsidthi Silpachai, head of capital-markets research at KBank. The smaller a market or country is, the higher the volatility, he explained. Investors "should hedge more and manage their liquidity if the disease is contagious to others, particularly Italy", Kobsidthi suggested. Italy's public debt is about ¤2 trillion.

From now on, the Thai currency will likely experience fluctuations but it is difficult to see the exact periods of volatility, depending on likely announcements of quantitative easing (QE) in continental Europe, Britain and the United States, Kobsidthi said.

If any QE is announced and there is an influx of foreign capital into the Thai markets, the Bank of Thailand may have to judge whether or not it is temporary. Currently, the Thai central bank's flexibility for intervention is sometimes limited in light of globalisation, Kobsidthi said.

Given the uncertainty over resolving Greece's sovereign debt problem, currencies including the baht could see high volatility, Songtum Pinto, director of the BOT's Macroeconomic Analysis Office, said yesterday.

Kobsidthi said that among regional currencies, "only the Malaysian ringgit, Indonesian rupiah and Indian rupee see higher volatility than the Thai baht".