HONG KONG, July 13: The sound of snapping currency pegs is hammering already weak sentiment throughout Asia, providing yet another reason for institutional money to find its way elsewhere, fund managers said.

"Unless prices correct very radically, it's difficult to see really strong inflows into these markets for the balance of the year," said David Semple, regional strategist with Peregrine Asset Management in Hong Kong.

The effective devaluation of both the Thai baht and the Philippine peso, together with a widening of the band for the Indonesia rupiah, have heightened concern about the fate of other Asian currencies such as the Malaysian ringgit.

Stock markets in Thailand and the Philippines rallied initially on the news of increased currency flexibility, which was widely expected and applauded.But fund managers said they were waiting to see the full economic effects of the devaluations, which would raise inflation, interest rates and trade deficits short-term.

Regardless of any positive long-term implications, devalued currencies inevitably lead to reduced valuations and, in all likelihood, lower corporate earnings.

"Even if prices stay the same, valuations are going to deteriorate," said Semple.

"Whilst all these things are happening, there is going to be a degree of uncertainty, and for those countries where there is uncertainty, they have to pay the price in higher interest rates in the short term, and that impacts on corporate earnings."

The worst effect, however, will be on sentiment towards the region which, with the notable exception of Hong Kong and China, is remarkably weak and unlikely to change any time soon.

"This shift in sentiment hasn'T happened over night. We've seen this region fall from grace over the last 12 to 18 months and I don'T think it's over," said James Wilson, institutional sales director at Deutsche Morgan Grenfell.

"People are now far more familiar with these markets, and their under-performance and all this turmoil in these currencies is a reflection that people are now looking at the fine print rather than the big picture," he said.

"One can now see the warts and inherent problems in these economies that, three years back, everyone was happy to sweep under the carpet."Allowing greater currency flexibility will enable some of these smaller nations to use interest rates more effectively to deflect inflationary or deflationary forces.

In the past, nations that raised interest rates to deflect inflationary forces merely attracted hot money invested by fund managers keen to earn higher returns on investment and avoid currency loss from the fixed exchange rate.

The process of adjustment, however, could be painful, with the Philippines forced to pay more pesos to finance a widening trade deficit and to service U.S.-Dollar-denominated debt.

Thailand is also suffering its way through a hard landing,with banks and finance companies merging to counter massive foreign liabilities.

And in the meantime, equity markets such as Malaysia confront short-term pain as the government fends off speculators trawling their way through the region.

"In their defence of the ringgit, Malaysia will do things such as raise interest rates that will hurt the economy," said David Descalzi, senior portfolio manager at Prudential Asia.

"The market is priced on earnings forecasts that are fairly robust, but if you take some of the steam out of those earnings through higher interest rates there could be a derating of the stockmarket. So the stockmarket is vulnerable." u

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.