Friday, November 13, 2009

Dejavu 1993, Capital Inflow, Asian Currencies Uptrend

It looks increasingly likely that we have seen the start of an inflow of capital into Asia. The weakening USD will help prop up US shares, but may see more international investors migrating excess funds into Asia to obtain a better return over the next 6 months. This looked much like the 1993 bull run in Asia. No, before you get ahead of my views, this is not going to be the repeat of the extended 1993-1996 bull run. The last 2 months have seen what we shall refer to as the US$ carry trade - borrowing in USD to invest elsewhere in anticipation of a weaker USD down the road. This is a replication of the yen carry trade which fueled much of the liquidity sloshing around all markets in 2007.

An example is the recent upgrade by Macquarie on Malaysian markets, mainly in anticipation of a higher ringgit value over the next 24 months. They forecast the RM/US$ will hit 3.20 (+6%) by end 2010 and 3.00 (+14%) by end 2011. Gawd, I hope they are right as I can travel overseas with a fatter wallet then. In fact Macquarie said that currencies usually overshoot, so we could easily hit 20%. The two key cross-rates to watch are RM/US$ and RM/Rmb:
- Immediate 10% upside suggested by RM/Rmb cross-rate: Macquarie believe over the next two quarters, the ringgit will appreciate to its previous fixed level against the Rmb.
- Additional 5–10% upside suggested by RM/US$ cross-rate by end 2010: They expect the renminbi and Asian currencies to resume its upward appreciation against the US$ in late 2010.

Taking this tack, importers will gain the most, eg Astro and auto companies, who import from Europe and the US. Thats the view of Macquarie, my view is that auto, auto parts and protected industries should be largely ignored over the next few years. Exporters such as plantations would suffer from an effective price cut. Companies with a high proportion of offshore earnings such as Parkson (> 90% of EBITDA), MISC (> 90%), YTL Power (75%), and KNM (60%) would have lower translated earnings.

Back to the foreign capital inflow - YTD net foreign portfolio investment in equities as of November 4, 2009: Best-performers: South Korea: US$21.18 billion, India: US$14.21 billion, Taiwan: 10.87 billion; Others: Thailand: US$1.51 billion, Indonesia: US$0.77 billion, the Philippines: US$0.40 billion, Pakistan: US$0.19 billion, Vietnam: US$0.01 billion, Japan: -US$17.12 billion. Can't seem to get the Malaysian figure but it should be negative judging from the previous posting on net foreign investors holdings of Malaysian stocks. All major Asian currencies are an appreciation path thanks to improving export performance and liquidity condition. Unlike 1997-98 crisis, Asia has enough reserves to defend its currencies and dollar liquidity has improved considerably when compared to Fall 2008, although it remains tight in some countries.

Notable economist Joseph Stiglitz said, "The inflows of easy money" is posing a risk of asset bubble in Asia as "such funds are usually not long-term investments and won't be a foundation for robust growth for Asia." Yes, we are seeing these short term funds finding Asia as a nice playground, but unlike the 93-96 rally, these funds will not be here very long, so we need to watch the US$ carry trade when they start unwinding in a big way. Presently, the outlook for most Asian currencies are still good for the next 6 months, and as Macquarie pointed out, the ringgit is a great selling point, so we are "safe" for the time being.

p/s photo: Han Ga In


HollyS said...


What's the point of Ringgit appreciating against USD and lossing against all other currencies like Aussies, Euro, Pound, Sing Dollar etc. Unless you are traveling specifically to the USA, you will be worst off.

Also, what's your best guess that the USD will start unwinding based on the past pattern in Yen carry trade?

Do you think the there will be a major support at 72 (Basket of currencies index of which currently is at 75)?

HollyS said...


What's your take on the USD? Do you think it will continue to depreciate for an extended period of time or do you think once the carry trade starts to unwind, the USD will reversed its decline? What's your best guess when this will happen?

Also I don't really agree that because USD depreciate against Ringgit, we can all travel cheaper. Ringgit actually lost value against all other major currencies such as Yen, Sing, Euro, Aussie, etc. Unless you specifically travel to US, HK or China, the rest of the world are more expensive.