Hot Money (Part 2)

Hot Money & South East Asian Stock Markets

Briefly touched on real interest rate and hot money in an earlier post: https://kenutau.wordpress.com/2016/02/12/real-interest-rate-hot-money/

BREXIT has certainly thrown a spanner into US Fed’s gradual plans in raising the fed funds rate. In fact, there may even be a rate cut in view of the prevailing uncertainties associated with BREXIT (http://fortune.com/2016/06/27/fed-interest-rate-brexit/).

Hot money from global quantitative easing programme has since created significant upward pressure on the asset prices of emerging markets (especially with South East Asian stock markets). Assuming a surprise rate hike or hike in market volatility this year, the South East Asian stock markets will potentially see a significant downward reversal due to flow of funds back to US assets.

Hot Money_10 Year_Jul16.jpeg

The magnitude of historical increase in the indices of respective stock markets will determine the extent of potential future reversal of these indices. From the above graph, it appears that the Jakarta Composite Index (“JCI”) has recorded the best relative performance since 2006 with more than 270% increase in its index, outperforming the rest of the selected South East Asian stock markets and S&P 500. Both Thailand’s SET and Malaysia’s KLCI have recorded relative performance of 110% and 78% respectively whilst S&P 500 only increased approximately 65%. Meanwhile, Singapore’s STI recorded a marginal increase of 17% since 2006.

Since 2011, the S&P500 has outperformed the selected South East Asian stock markets. Both SET and JCI have performed at 32% and 26% respectively whilst Singapore underperformed at negative 9%.

Hot Money_5 Year_Jul16.jpeg

In the past two years, both Malaysia and Singapore have underperformed at more than negative 10% whilst JCI is the only selected South East Asian stock market that has a positive relative performance.

Hot Money_2 Year_Jul16.jpeg

In one year timeframe, all selected South East Asian markets have corrected, i.e recording negative returns.

Hot Money_1 Year_Jul16

Final Words

This is a simple analysis without a detailed account of each country’s macroeconomic fundamentals. Nevertheless, it does present an angle to identify potential reversals in selected stock markets. JCI appears to be potentially most vulnerable whilst Singapore may appear to be resilient towards future correction.

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Real Interest Rate & Hot Money

Central banks have been cutting interest rates, with the latest moves by Japan and Sweden. The deliberate moves result in planned devaluation of their currencies. So, where is “hot money” going?

How will real interest rate affect currency?

Higher real interest rates tend to lead to an appreciation in the currency. This is because high interest rates means saving in that country gives a better return. Therefore investors often move funds to countries with higher interest rates. (this is known as hot money flowshttp://www.economicshelp.org/blog/5394/interest-rates/interest-rates-and-exchange-rate/

The following graph depicts current position of real interest rate for respective countries:

RIR

Hot money going into Brazil?

With the highest relative real interest rate (at this point in time), the Brazilian real should be able to appreciate. Nevertheless, there are many economic issues with the country as well as falling  crude oil prices have impacted on Brazil.

ASEAN Countries

Indonesia appears attractive in terms of real interest rate (highest among the ASEAN countries). However, Indonesia has now run both current-account and fiscal deficits for three years in a row, a gnawing problem that is undermining its currency and could upset a high-spirited stock market.

http://asia.nikkei.com/Politics-Economy/Economy/Indonesia-s-twin-deficits-becoming-chronic

Second on the list – Philippines looks like a promising destination to attract hot money

Developed Nations

Singapore is the developed country with the highest real interest rate, not because it has a high nominal interest rate but due to its current deflationary trend. Will it be the next Japan, suffering long term deflation?

 

Key implications : 

  • Foreign exchange movements are subject to numerous macro factors. Nevertheless, differential real interest rate may provide guidance as to the direction of hot money and carry trade pairs
  • Will we see a reversal of capital flows back to emerging markets (due to higher real interest rates)?
  • However, when there is economic turmoil, capital will flow into “safe haven” assets

 

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.