Saturday July 21, 2012
Analysts: Carry trades will intensify inflows
By DANIEL KHOO
KUALA LUMPUR: Foreign fund inflows are expected to further flood the financial markets, both in equities, money markets and the bond markets in Malaysia and the Asean region because of the “carry-trade” phenomenon, according to analysts and fund managers surveyed.
This scenario comes on the back of historically low interest rates in the region but still higher than developed countries in Europe and the United States which makes the Asean region an attractive and a bright spot to park foreign money from the carry-trade phenomenon.
The carry-trade phenomenon as it is known, is a financial occurrance known to move financial markets in a significant way whereby hedge funds and market makers take advantage of interest rate differentials between international currencies: borrowing from lower yielding currencies in the West and parking it on a short- and long-term basis into higher-yielding financial assets.
“Yes the carry trade happens and further inflows are expected into the Asean region. This carry-trade scenario is also premised upon how economies are performing in this region, presently, the Asean nations are the best performing economies in the world with strong country balance sheets relative to regions such as Europe,” Singular Asset Management’s chief investment officer Teoh Kok Lin told StarBizWeek.
“What is happening now is that Asean countries have learnt their painful lesson from the 1997 financial crisis and are very much careful today with managing their balance sheets.”
Meanwhile, managing director of Aberdeen Asset Management Sdn Bhd Gerald Ambrose said that on this carry-trade phenomenon backdrop, the ringgit – which has been weakening and underperforming Asean currencies of late – would eventually strengthen to 2.50 per US dollar.
“If you look at the situation, other Asean currencies such as the Singapore dollar have strengthened to levels before the Asian financial crisis erupted.
“The ringgit was trading at the 2.50 per US dollar level before the crisis then happened. I expect the ringgit to continue to strengthen to that level moving forward,” Ambrose said.
“There is a lot more upside for the ringgit presently due to the strong domestic demand and the relatively younger population here which will propel economic growth moving forward. The ringgit needs to strengthen and this will happen because the recovery in the United States will take a really long time.”
Ambrose also said that the carry-trade phenomenon would likely benefit Asean currencies in general, namely the rupiah and Australian dollar as they have comparatively higher yields than Western economies, but added that this would largely depend on the mood of market participants.
Two currency traders said this scenario would likely see a severe weakening of the US dollar and the euro versus Asian currencies in general, particularly the ringgit, because it is a commodity-linked currency.
“Malaysia’s currency, given that it is still a net oil exporter and a major palm oil commodity exporter, will benefit from the inflows and strengthen. When a country is exporting a commodity that is wanted and is in demand globally, the country’s bottomline will benefit from this demand, as this enhances the country’s revenue,” a currency trader said.
To recap, the European Central Bank recently cut its benchmark interest rate to a record low of 0.75% from 1%; yields on the euro today are lower than the 3.414 yields on Malaysian 10-year government bonds. It is notable that Malaysian 10-year government bonds have seen their yields declining in the past four months from 3.672 in late March.