Turning off the QE tap, what is next?
by Hasmayati Mustapha
After enjoying a brief post-election rally on the first week of May , mid May to June is indeed a
nerve wrecking roller coaster ride.The US Federal Reserve easing of monetary stimulus has rattled
the market globally. This moves is expected but setting a schedule of tapering asset
purchasing has triggered a fierce fire to more panic selling.
Now that we are facing the reality of hot money flowing out, what else to expect in this time of
economic uncertainties? Looking at the wild volatility throughout Europe and
the Asia Pacific, will there be more bumpy journey ahead? The sooner we brace
the harsh reality, the faster we could adjust to our new strategies.
Hot money flow is always a double sword culprit that exert traumatic pain as well as exciting gain.
This is the painful reality of a short term capital flow from huge hedge fund. It is a touch-and-go
agenda where ever there are honey to be extracted and leave when it turns sour. Excuses are
plentiful when they need to exit the market.
Seventy percent of the transactions done in the Wall Street are purely speculative trading and
manipulation according to the American analysts interviewed by Bloomberg.
Some of the bigger hedge fund that manage US$800 billion could easily trigger a havoc impact in
the equity market. Some of these foreign funds that came to the Asia Pacific's shore in late 2012 has
eventually exit attributed to several concerns.
Firstly, the Standard & Poor has upgraded the American's debts on early sign of US road to
recovery. Key economic data such as new jobs offer, consumer spending and payroll are
positively growing. The unemployment rate of above 7.2% is however still very high. The latter
will lead the Fed to adjust its bond buying pace until the conditions desired are achievable.
Wall Street investors and rest of the world had over reacted on the recent
announcement of Ben Bernanke's time frame of reducing the quantitative easing.
Most are rushing to sell off fear full of further tightening measures such as tax and lending rate
hike. These concerns caused a massive selling pressure across the globe. The Asia Pacific
region and emerging markets with growth potentials are not spared.
Why are the market so jittery and throwing tapering-tantrum globally? The fact is Ben Bernanke
is only tapering and not tightening yet as the US economy is still fragile. Equities investors
cannot expect the expansion of monetary stimulus to prolong just to appease the Wall Street.
The impact of prolong QE would be more disastrous to the global economy in the long run.
Could the economy possibly gain stronger recovery traction by extending QE? Most economists
concurred that it is only effective for a short term measure. After all the road to recovery and
prosperity is not creating prolong heavy debts but through prudent public spending and building
of sustainable strong trade export. Nevertheless, to appease the market, the Fed's chairman said it
will remain committed to maintain low interest rate until there are clear signals of strong economic
recovery.
Another concern is Japan. It is seen following the path of US's loose monetary policy. Abenomics is
faltering as Japanese executives cites domestic demand in Japan is not helping much on the back of
weak demographics and declining population. This explained why Nikkei fell as much as 8%
single day.
Next is the second largest world's economy China. The latest data showed that its growth has
slowed down. The world bank has down graded its growth forecast from 8.4% to 7.7%. The main
concerns are the sharp fall of export and direct investment plus the credit crunch.
Stormy before sunshine?
All the gloom and doom seems to be the major headlines lately. Look at different prospective,
it is not all that gloom at least in Asian region with growth opportunities. Wall Street
concern of tapering of QE is worth looking at the second chance.
Looking at the positive angle, tapering is not a dead end road. It is a necessary automatic
debt reduction to lay a foundation for a smooth journey to recovery. It reveals there are
improvements in the US economy albeit at slow pace. By announcing confidently the dateline of
QE easing, effective from September to first quarter of 2014, it is indeed a firm committement that
the Fed are serious to hasten recovery. If the Fed's calculations is right, and the tapering program
turns out effective according to their planning, foreign exports will pick up positively for
big economy like China, Japan and even smaller economy like Malaysia will also benefit from US
better economy.
Usually, market indicator is far ahead of the economic barometer as market reacted faster and
rapidly as compared to time lag in the real economy. If it is of any consolation to investors, the
pressure of selling in the Asia Pacific will eventually easing off. The irrationals of panic selling
due to weak economic data of Japan and China is normal as global fund adjust their portfolios and
assets classes according to their valuation and navigation of opportunities. Even poorer EU cousins
like Greece and Spain attracted a lot of global attention and market reactions last year.
As long as interest rate remained low, the equity market is still the best investment options regardless
of many more hurdles along the way. So far US, Europe, Asia Pacific and Asian is keeping the rate
accommodative with the exception of Indonesia to tame its high inflation
At home, FBM KLCI is the most defensive and falling the least relative to the rest of the regional
market that has slashed more than 10 percent in a month. Although KLCI had also caught some
cold when the Wall Street sneezed, the delayed selling pressure is at least expected when we are
ready to react.
Amid volatility, and early sign of US green shoot, what shall we do? It is best to
look for stability, not just high yield companies. Non cyclical and steady business model with
growth opportunities globally. Avoid air carriers with US dollar dominated debt. Their borrowing
value will be higher when US dollar appreciates and Ringgit depreciates. Perhaps technology sector
is worth considering once the US economy is financially healthy to begin import again.
Let us hope that we will not see a repeat of 1997 pre-condition crisis. Malaysia is in a much better
position now as BNM has done a good job enhancing banking system surveillance.
Besides, BNM reserves also has increased to RM435 billion or US$ 141 billion up to mid June.
The country debt is domestically financed although almost reaching the ceiling level of 55% of
GDP.
Opportunities – don't miss it!
There are plenty of good fish to catch in the volatile market if you could control your fear. In fact on
Friday 21st June, 2013, Batu Kawan fell RM5.76, Hap Seng Plantation, CBIP, TDM and Coastal all
hit limit down price. All these companies rebounded handsomely the next day and thereafter.
Programmed selling pressure may not be over yet but the nerve wrecking volatility also presents a
good bargain opportunities for the daring risk takers with deep pocket. So stay alert, stay sharp and
think positively
