In recent weeks, global financial markets are seeing gyrations with Asian markets taking a big hit as a result of the fears that the US Federal Reserve (US Fed)is pulling back its ‘punchbowl’ on its $83.0 billion a day Quantitative Easing (QE) programme earlier than anticipated, and the conclusion of the two-day Bank of Japan (BOJ) meeting on June 11, 2013, indicating that Governor Haruhiko Kuroda was not planning any further intervention on the purchase of Japanese REIT (J-REIT) stocks, Japanese Government Bonds (JGBs), and exchange traded funds (ETFs) at the current moment. The main South-East Asian markets including Indonesia, Philippines, and Thailand taking the biggest hit with intraday declines of between 3.0 percent to 5.0 percent. Elsewhere in Asia, India was also being impacted with its Indian Rupee currency declining by the most in recent weeks, and is now the worst performing currency in all of Asia for the year. There have not been any rumours of intervention from the Reserve Bank of India (RBI) to sell its dollar reserves, and buy the Indian Rupees yet, but if the recent declines prove to be destabilising, monetary intervention from RBI is possible given the current global market uncertainties.
Turning back to South-East Asia, there are several causes for the market sell offs in the three key emerging countries (Indonesia, Philippines, and Thailand). One of the causes has been attributed to the unwinding of the so-called Yen carry-trades, where fund managers borrow Japanese Yen to fund their Euro Yen investments due to its low margin rates. However, with JGB yields rising for the past few weeks since May 23, 2013, these fund managers are caught off-guard, and are now in the process of unwinding those carry trades, top of which is to liquidate their fund positions in these three key South-East Asian emerging markets, and elsewhere, in order to repay their margin calls. While the unwinding of those Yen carry trades are continuing, recent figures, including the unemployment figures in the United States for the month of May 2013 showed an increase of 175,000 payrolls, ahead of average market expectations of 164,000, and unemployment rate ticking slightly higher to 7.6 percent from 7.5 percent previously. Along with that, several US Fed Presidents (both doves and hawks with regards to their views on the monetary policy in the US) made various rounds in the speakers circuit commenting on the future direction of the US monetary policies. These include Dallas Fed Chief, Mr. Richard Fisher making several hawkish comments regarding the need to begin the tapering process of the ongoing QE programme at some point. Although, Fisher is not a current voting member, it does provide investors and traders an indication of which direction is the US Fed heading to regarding the management of the monetary policy in the next few months.
The South East Asian markets of Indonesia, Philippines, and Thailand have been beneficiaries of these ‘cheap’ money flowing through since the start of the first QE programme in 2009, following the outbreak Global Financial Crisis (GFC) in the Fall of 2008. In order to tame the severe volatilities and near collapse of the money markets globally, the US Fed, along with other G-7 nations monetary authorities, such as the European Central Bank (ECB), the Bank of England, the Bank of Japan, the Bank of Canada, etc. started to ‘pump’ in liquidity into the system in order to restore calm among investors around the world. This led to a major influx of funds searching for higher yields including the three emerging South-East Asian markets mentioned. All three markets enjoyed high growth in various forms including consumer demand, low interest rates, robust exports, a booming real estate market, etc. All these events resulted in the robustness seen in all three markets for the past few years. Along with a relatively young population, their citizens benefit tremendously from the various forms of foreign direct investments (FDI).
Then, Japan came along with the change of its leadership in early 2013 as a result of an overwhelming electoral support for Liberal Democratic Party (LDP) candidate and now Prime Minster, Shinzo Abe, who has laid out his aggressive economic revival plan, which includes the purchase of JGBs, and appointing Mr. Haruhiko Kuroda, a former Asian Development Bank (ADB) President, to head the BOJ, replacing Masaaki Shirakawa as the next Governor in April 2013. The economic plan touted as ‘Abenomics’ together with a comprehensive ‘Three Arrows’ programme aimed at reviving the decades old deflationary cycle seen in Japan. However, in a speech made last week on June 05, 2013 by Prime Minister Abe, touted the ‘Third Arrow’, there were lack of specifics as to how the economic plans are going to be implemented, especially with the upcoming Upper House elections scheduled to begin on July 21, 2013. With that, markets around the world are now seeing various degrees of uncertainty. According to a June 12, 2013 Bloomberg Television interview with one of the Bloomberg Markets Singapore-based correspondent, Haslinda Hani, where she responded to Susan Li, host of the programme ‘First Up’, and was quoted as saying that the market routs currently taking place in the three emerging markets of Indonesia, Philippines, and Thailand are not going to end soon, as fund managers are still in the process of unwinding of their Yen carry trades, and seek for the safety of US Treasury Inflationary-Protection Securities (US TIPs) and/or cash in order to preserve their risk-adjusted returns.
For the final conclusion, I agree with Haslinda from Bloomberg Markets, that the three South East Asian markets are not going to see any ‘light at the end of the tunnel’ for a while. It is only the early days of the unwinding of the Yen carry trades, however, based on the views expressed by one of the market strategists from ‘The Motley Fool’ in Singapore, who was interviewed by Channelnewsasia on the evening of June 11, 2013, is that with US markets are expected to start recovering in the next few months or so. With that, he pointed out that there will be many beneficiaries if one were to look closer the long-term fundamentals of the US economy as markets are starting to recover from the global financial crisis (GFC), and investors should not be too concerned despite the short-term financial markets’ volatility taking place.