Goh Eng Yeow on how a weaker greenback impacts regional equities markets.
THE buoyancy in Asian stock markets today reminds me of a law in physics — the Principle of Flotation — which every student would have studied during his secondary school education.
Essentially, it says that an object can float on water because there is an equivalent mass of fluid beneath it which is giving it support.
With equities levitating to levels last seen in 12 months ago, I wonder if there is a similar principle at work in the financial markets.
I spent yesterday writing an analysis on an esoteric subject — US dollar carry trade. No many people understand what it is all about or how to track the size of the trade, but it is probably the biggest factor influencing the direction of the financial markets currently.
With US interest rates at almost zero per cent and the greenback sinking to almost all-time low against the Japanese yen and the euro, it is a no-brainer for any bright trader to borrow heavily in greenback to make big bets on other asset classes.
In doing so, he is betting that when he has to repay the greenback loan, the US dollar would have fallen sharply, and so the asset he has brought would be worth a lot more in greenback terms.
This has propelled the stock market here, as well as those elsewhere in Asia sharply higher, as cheap money floods the market and the resulting rising tide lifts all equities – quite literally.
The carry trade is also providing the fuel for the renewed spate of mergers and acquisitions.
Just watch Wall Street last night when the Dow shot up 123 points on a wave of M&A fever. When money becomes so cheap, chief executives start becoming empire builders again.
But apart from the equity investors who stand to make a killing from the galloping stock markets, why should anyone else bother about it?
A weakening greenback has consequences far beyond the equities markets.
As the Japanese have discovered to their horror, the switching out of yen into US dollar borrowings has caused their currency to surge to near record high levels, raising fears that their companies may be priced out of business altogether.
This is despite all the warning signals flagging red that it is in danger of falling into a deflation trap again because of falling demand, as people anticipate tougher times ahead and cut back on their spending.
For the rest of us, another fear looms – the spectre of run-away inflation if the prices of oil and other raw materials surge and cause an untenable rise in consumer prices.
So far, this has not happened. Because the US and Europe have been mired in recession, demand has been weak and there is more than ample supply of oil available, and this has dampened the pricing power of the producers.
But this sweet spot may not last forever.
Eventually, the supplies would have been used up, and there would be pressure to raise oil prices to compensate for the weakening dollar.
For investors, the best strategy going forward is to track the US dollar.
I expect regional markets to enjoy the sea of support provided by the US dollar carry trade, until the greenback strengthens and forces a un-winding of the carry trade.
Then it is time to get hell out of the market and stay in cash. It is worth recalling the violence which had accompanied earlier unwinding of the yen carry trades during the Asian financial crisis in 1997-98 and again during the recent global financial crisis,
How long will this rally last?
It is hard to tell, but bearings on the equities markets in the near future, in all likelihood, will come from the currency market.
Tags:
currency,
equities,
finance,
money,
singapore
So.. Mr Goh..you did not answer..or can't because they will have your g*****s for lunch.
What about.."Analysing Temasek Holdings’ Review: Does portfolio value mean anything?"
My response to the comments on unrelated subjects appearing on my blog.
The purpose of my blog is to give my views on market trends and factors affecting them - be it AIG's horrendous losses last September, Citi's near-death experience, or HSBC's eye-popping cash-call in March to shore up confidence.
Hopefully, this gives investors a handle to make better investment decisions, since financial calamities elsewhere now affects the whole region - not merely Singapore.
The unrelated subjects raised by citizenlost and unemployedsporean do not have a bearing on market trends.
My latest blog, for example, highlights obscure corners of the financial markets like US dollar carry trade which most people are probably unaware of, but is now the biggest factor influencing on both the stock markets and galloping real estate prices in the region.
There is no need to descend to calling me derogatory terms, simply because certain topics are not discussed. Indeed, some of them are already topics of debate elsewhere !
What I hope to do is that by regularly flagging issues of salient interest in this blog and in ST, readers' understanding of the mechanics in the stock market can be improved.
engyeow
So, Mr EY Goh, what does the Straits Times "Tekka" market correspondent think of this?
Psst..file this..because you wont read this ever ..in your paper.
But bet you know where to access it, in any case.
Analysing Temasek Holdings’ Review:
Does portfolio value mean anything?
Temasek Holdings released its annual report on 17th September 2009 which was duly highlighted in the best possible light with a bold header of ‘Temasek Rebounds’ (Straits Times, September 18).
Unfortunately, Temasek Review 2009 seems to have more questions than answers (not necessarily a surprise), some which would serve the interests of the fundamental shareholders to be answered – and we are not talking about the Ministry of Finance which is its sole shareholder.
The focus in the report has again predominately been the Portfolio Value which refers to the market value of the various assets under its charge. These include local heavyweights such as Singtel, Standard Chartered, DBS Group and CapitaLand, as well as other overseas entities based in China, India, US and even Brazil. This Portfolio Value has risen steadily over the years from $90 billion in 2004 to $185 billion in 2008 (and in between consecutive years too) before spectacularly dropping by $55 billion in 2009 to $130 billion.
The information from the press and Temasek Holdings contrasts this single drop in portfolio value against previous years’ stellar values and puts the blame of poor performance squarely on the global financial crisis which has taken the world by (thunder)storm.
However, the Temasek Review 2009 (pages 21 and 22) also reveals another figure which is termed ‘Wealth Added’ and reports this value as a ‘negative $68 billion’ (a positive way of saying the ‘Wealth Deducted’ was $68.1 billion) which certainly does not tally with the reported drop of $55 billion in Portfolio Value. The description of the Wealth Added component according to the Temasek Review 2009 includes various components such as operating cost and capital charges, among others.
However, this component conveniently includes any capital injections (whose exact amount would be hidden here) and thus the Portfolio Value of $130 billion which is overemphasised by the parties concerned could very well be lower had the capital injection (if any) not been included in estimating this value.
* $68.1 billion includes the market value change (-$55 billion)
* The remaining $13.1 billion ($68 – $55 billion) includes operating costs, capital charges, any opportunity cost involved, and capital injections
* Thus the capital injection could have theoretical been as much as $13.1 billion (if there had been no other charges or expenses) with a probable estimate being $10 billion (based on Temasek Review 2008 – page 19)
Although this may be creative accounting at its best, the implications of not knowing these figures are rather significant. Without knowing whether there was a capital injection and if so, how much, we are left to speculate on the actual loss of the Portfolio Value. Using the figures available in Temasek Review 2009, we can estimate that the ‘true’ Portfolio Value could have been as low as $116.9 billion ($185 – $68.1 billion) as contrasted against the reported $130 billion.
Interestingly, the Wealth Added for 2008 was also a negative value ($6.3 billion) which seems to suggest that any growth in Portfolio Value (for any year’s performance) may not necessarily translate into ‘wealth’. Thus, there is a need to relook the wisdom of using Portfolio Value as a measure of success or performance instead of Wealth Added.
Imagine buying your home for $200,000 and boasting about the current market value of $300,000 (implying a profit of $100,000 should you sell). However, if you were to actually sell your home and the various levies, loan interest charges, fees and CPF account reimbursements are then deducted, the net returns may very well be just a few thousand dollars. In this example, the Portfolio Value would be the buying and selling prices of the home and the Wealth Added would be the actual money that you get in your pocket. As can be seen through this example, the price of your home (i.e. Portfolio Value) is hardly anything more than a bragging right and the net returns that you (can) get (i.e. Wealth Added) is what really matters.
This year’s annual report also included the new term ‘retraced its value’ (Temasek Review 2009, page 8 & 18). A rose by any other name may still be a rose but it is apparent that the Temasek Review still holds positive spin above all else. Not content with just one creative adjective, it goes on to add ‘retracted its value’ (Temasek Review 2009, page 6) to further reinforce the implied notion that the drop in value is not a drop in value.
A retracing or retraction of value seems to imply that it was a mere reversal or a rewind to 3 years earlier (2006), but notably, operating costs are NOT at these levels – in fact they are 3 times more in 2009 (Temasek Review 2009, page 28). Also, if the drop in Portfolio Value symbolises a return to 2006, then logic would dictate that salaries paid in 2006 and 2007 should be recovered in tandem. Thus, a play on semantics is not always a good idea, especially on the back of such a catastrophic financial performance.
What if you had to take a pay cut ((You know all about that Mr Goh)that amounts to 3 years’ increment? Could you go around to your creditors and tell them, “Sorry my salary retraced by 3 years.” Would that change anything in the eyes of these creditors?
Finally, the Straits Times’ Alvin Foo (is he a political correspondent or PAP spokesperson in disguise) was more than happy to pen down,
“The portfolio sank from a peak of $185 billion on March 31 last year to $130 billion on March 31 this year, according to its annual report, which was out on Thursday. It also showed that the portfolio had rebounded to $172 billion as at July 31.” Temasek Rebounds (18 September 2009).
However, the "reporter" failed (he had to) to realise that the annual report (Temasek Review 2009) made no reference to the ‘magic’ $172 billion and, in fact, this figure appears only in the CEO’s Opening Remarks (page 2).
If a child takes an exam and is unable to answer a question but later on gets the answer, is he or she able to go back and include this information and improve his final score? Here, the ‘exam’ for Temasek Holdings ended on 31st March 2009 and it is thus meaningless to talk about any issue after the fact.
At the end of reviewing Temasek Review 2009, we would urge Temasek Holdings to;
a) issue a correction to the misrepresentation by Straits Times attributing the reported July 2009 Portfolio Value to its annual report
b) reveal its monthly Portfolio Value for at least the last 3 years for an adequate comparison of the July figure of $172 billion (which incidentally is featured prominently on the homepage of its website)
c) disclose the exact components (especially any capital injection) and their accompanying figures involved that resulted in the Wealth Added figure of negative $68.1 billion
These are the critical factors that enable the ultimate shareholders (citizens of Singapore) to assess and understand and query the actual performance of Temasek Holdings in the financial year ended 31st March 2009, and the speculative performance in the four months thereafter.
But for us, its citizens, its like talking to a wall.
Its supposed to be none of our business.
Thanks for the enlightenment. I am been wondering what keeps the market afloat. Almost all people I spoke to are cautious and slightly pessimistic, contrary to what I read on the newspaper and analysts comment.
If the 2nd wave of crisis come, a lot of people would suffer - the housing mini bubble, and ever-increasing stocks valuation.