The black clouds hanging over the South East Asian emerging markets are only partly the responsibility of crop-burning farmers on the coast of Malaysia or loggers in Indonesia. Since the fall of the Thai baht, currencies and stockmarkets in several neighbouring countries have taken severe hits and investors in the region have been left reeling.

As at 1 October, the stockmarket indices in Thailand, Malaysia, Philippines and Indonesia were down 53.1%, 51.8%, 50.2% and 41.8% respectively since January. Even Singapore, traditionally regarded as something of a safe haven in the region, was down over 20%, mostly attributable to currency weakening.

Investors have fled the region in droves, their departure arousing some strong reactions and colourful language from at least one government leader. The turnaround in sentiment was swift: as an example Foreign & Colonial's allocation to the Asian tigers for its Emerging Markets Investment Trust fell from 28.55% at the end of March to 15.39% by the end of August. Malaysia, Singapore and Thailand, which between them had accounted for some 35% of total Asian exposure in March, had been ejected from the list by the end of August.

But, as the figures from performance data analyst Micropal show, it would be wrong to tar the whole of South East Asia with the same brush. While some of the above-mentioned countries were falling into the abyss, stockmarkets in places like Pakistan (up 35.7%), Taiwan (up 20.6%) and India (up 16.5%) were performing well. The star, however, was Sri Lanka, where the three specialist funds listed by Micropal managed an average return of +47.86% over the year to 1 September 1997.

Even within some of the poorer performing markets, performance figures show that a handful of funds have managed to go against the trend and make positive gains for their investors. Thus in Singapore, where the average fund made a small loss over the one-year period, Govett & Co's Singapore Sesdaq fund returned a highly creditable 68.3%. In Korea, where the average fund lost almost 20% over the period, both the Korea Special Opportunities Fund and CITC Seoul Legend Trust made positive returns - 17.8% and 7.5% respectively. The only other fund invested in the region to make a profit over the year was Nomura's Aurora II Indonesia fund, which recorded a 2.6% gain against a sector average loss of almost 24%.

In the other Asian emerging markets it was a question of the top funds in a sector making less of a loss than the others, rather than making a profit. So, in relative terms, in the worst-hit market - Thailand - Crosby Asset Management's Thai Development Capital Fund, with a loss of just over 10%, looks pretty good when compared to a sector average loss of almost 59%.

Similarly, in the Philippines, the US dollar-denominated MeesPierson Philippine Income Fund, which lost almost 5% over the year, still compares very well with both the next best fund - Philippine Strategy Investment, which lost over 25% - and the sector average loss of over 41%.

As investors in Latin America found four years or so ago, emerging market investment is all about volatility - huge gains followed by periodic slumps. But while the rebound from the tequila" crash was rapid, there are ominous signs that the current turmoil in South East Asia may take longer to sort out and turn around.

While few dispute the region's long-term potential, most commentators agree that the key to getting back on track is for governments to accept that there were underlying problems with their economies, stomach the medicine that has been handed out and start taking positive steps to put things right. To-date, certainly as far as Thailand and Malaysia are concerned, the indications are that they are not yet ready to do this.

In a similar situation, the Mexican government put its cards on the table and, with external help, managed to restore confidence relatively swiftly. But the Thai authorities have shown a marked reluctance to come clean about the true state of affairs. Financial information has leaked out only slowly, leaving i nvestors wondering what other skeletons may be hidden in the cupboard.

Malaysia, too, has yet to fully accept that the root problem had more to do with the way it had expanded its economy and its external debt situation than with the actions of speculators and "moronic" investors. Until international investors perceive that governments putting sensible policies into action, capital inflows, which a number of these economies rely on, are unlikely to resume.

"Several governments are making the right responses," says Charles Fowler, Asian fund manager at Govett & Co, "but we need to see them follow it through."