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Is another Asian Financial Crisis coming?

While the global financial crisis (GFC) is still fresh in many investors’ minds, the ‘Asian Financial Crisis’ (AFC) as it was known when it occurred in July 1997 is for many a distant memory. Like the GFC, the AFC sparked fear of financial contagion and worldwide economic meltdown.

While few economists are claiming things are dire — Asia, Latin America and other developing countries are currently under financial pressure, which is being closely observed. The current ‘flare up’ has seen the Indian Rupee crash by 14% and the Brazilian Real by 16% over the past three months. South Africa’s Rand and the Indonesian Rupiah are also down over 10% each. Correspondingly investor concern in the outlook for these countries has pushed bond yields into double-digit territory.

Stock markets are following suit with the Jakarta Composite Index and India’s benchmark the BSE Sensex are both down over 5% in a week. Platinum Asset Management (ASX: PTM) is one domestic company exposed to the current ruptures in Asian stock markets through the funds it manages. Platinum’s experience at investing in Asia and its history of performing particularly well during market disruptions could see the firm use the current turbulence to its advantage.

The current problems appear to be at least partly caused by the flow of investor money out of emerging markets as foreign investors prepare for the US Federal Reserve to ‘taper.’ The cheap money that previously flowed into Asian and Latin America now appears to be leaving in a hurry. Nobel Prize-winning economist Paul Krugman is watching closely as events unfold and recently penned an article on the issue for the New York Times. Krugman believes these developing countries will be spared from a 1997 AFC-type event however he says it with his fingers crossed.

Foolish takeaway

There is almost always a dark cloud looming somewhere when you are investing. The potential for round 2 of an Asian Financial Crisis if of course a possibility, however at present it would appear to be slight. Should it flare up, firms which have been expanding their business interests in Asia such as ANZ (ASX: ANZ) could pose the most risk for domestic investors.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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