TAIPEI/LONDON - SOME developing markets run the risk of seeing global investment flows fall further after economies shut their equity markets outright or clamped price controls during the peak of the financial crisis.

Regulators have intervened in Indonesia, Vietnam, Russia, Taiwan and Pakistan in the last few months, looking to stem outflows from investors fleeing fast-growing but vulnerable emerging economies.

As a result, sellers - many of them international investors - were left holding stocks which they could not sell due to market closures and government-imposed selling limits.

'Foreign investors are likely to increase the magnitude of their selling in such markets in the short term in response to the government-imposed actions,' said Mr Farhan Rizvi, a senior analyst at JS Global Capital in Karachi.

'Moreover, such regulatory intervention would also have long-term implications they tend to reduce investor confidence and create doubts regarding future investment,' he said.

Emerging market equity funds had outflows of US$7.1 billion (S$10.6 billion) in October, according to data from fund tracker EPFR Global.

Asia ex-Japan funds recorded net outflows of US$1 billion in the last week of October, extending their losing streak to eight consecutive weeks.

Asia's 1997/98 financial crisis had also prompted market interventions, ranging from Malaysia's imposition of capital controls to thwart the flight of foreign capital to a US$15 billion move by Hong Kong to ward off speculators.

'When you are in a situation where even the most established markets such as the UK and the US are putting restrictions on short selling, it's setting a bit of an example, then other countries are more extreme,' said Mr Andrew Howell, emerging equities strategist at Citi in New York.

'The frontier markets are getting hit harder in this environment. When liquidity dries up, they are the first to suffer. There is not a real institutional framework that you can rely on,' he said.

INTERVENTIONS

Even as regulators across the world have injected extra liquidity to help markets since September, some emerging markets went a step beyond, getting closer to outright intervention.

'A relatively immature equity culture has taken hold in many countries in the past few years of boom, there is the risk that withers very quickly,' said Citi's Howell.

Such interventions could see these markets suffer ratings setbacks in their moves to attract global investors.

Pakistan imposed an artificial floor under its main stock index, preventing it from falling below a certain level, choking off trading volumes.

The move could see Pakistan expelled from the benchmark MSCI emerging equities index, the global head of index research at MSCI Barra told Reuters in late September.

Ratings are crucial as many investors only buy into markets ranked by index compilers such as FTSE and Morgan Stanley's MSCI.

Since mid-September, Taiwan has fallen 22 per cent, Indonesia lost 24 per cent and Russia plunged 39 per cent. In comparison, the MSCI emerging markets index has shed 32 per cent.

TURNOVER TURN-OFF

Taiwan offers an example of the shorter-term impact developing markets could face. After its financial regulator imposed a maximum 3.5 per cent lower limit for individual stocks last month, daily turnover dropped sharply to hit its lowest level in eight years.

Despite the low volume, foreign money flooded out of Taiwan for the month, with overseas investors pulling a net NT$115 billion (S$5.2 billion) - the second highest total for the year.

'The biggest problem is market liquidity, because what it means to foreign investors is that they cannot sell even if they want to,' said Mr Sheng Yen, a Taiwan-based fund manager at Franklin Templeton.

Russia started halting trading sporadically in September as the market embarked on some of its worst declines since the country's 1998 financial collapse, while Taiwan, Indonesia and Pakistan all made their moves after similar sharp declines.

'When markets are in a panic, the government should step in,' said JF Asset Management CEO David Hsu. 'But even if a government puts a floor on how much stocks can fall, it would still be impossible to stop them from falling ultimately.'-- REUTERS