THE outflow of foreign capital from emerging markets is the trend these days.
The ringgit, which has been described as being in a tight spot, has
fallen 6.6% since May 22, when the Fed first raised the spectre of an
early stimulus withdrawal, reports the
Singapore Business Times.
The ringgit has been trading at three-year lows against the US
dollar, and month-long selling has pushed 10-year Malaysian government
bond yields to their highest in 2½ years, says the report.
The reason is “an exodus of foreign capital, as investors reassess
emerging markets most at risk from a withdrawal of US easy money
policy,” it adds.
The Indian rupee has dropped more severely by 8.5% since May 22.
India has been described as being “caught in the middle”, as the
United States ponders tapering off its quantitative easing policy,
causing volatility in emerging markets, as investors pull money out.
India was enjoying a growth rate of 9% just two years ago. Now, the
Reserve Bank of India is forecasting growth at 5.5% for the fiscal year
ending next March, says the
SBT.
Reliance on foreign capital has always been a dangerous game, and the authorities are well aware of that.
In some quarters, it is a known fact that foreign capital is not really welcome, as it wreaks havoc with its large movements.
Economies in South-East Asia, especially, have to be very cautious
of foreign capital, as the impact can be severe once they withdraw their
funds.
Fund flows are usually tracked by central banks, which will have an indication of the inflows and outflows.
The economy itself should be fundamentlly strong and able to withstand the shock of any outflow.
High economic growth is not really the objective in this case, but rather steady, resilient and broad-based growth.
Investors in emerging markets should be prepared for such a phenomenon and get ready with their asset allocation strategies.
Mark Mobius, the executive chairman of Templeton EM Group, was quoted by
The Economic Times of India as saying that funds were expected to flow back into emerging markets.
“We think there will be a bounce-back because there has been too
much negativity and that has pushed prices down to levels where there is
a chance of an upsurge again,” he is quoted as saying.
The Australian central bank has cut rates for the eighth time in
less than two years in a bid to improve sluggish growth, as a boom in
mining investment over the past decade comes to an end, says the
International Herald Tribune (
IHT).
The
Reserve Bank of Australia
lowered its benchmark cash rate by a quarter of a percentage point to a
record low of 2.5%, bringing the total cuts since November 2011 to 2.25
percentage points.
The Australian currency, which is closely watched by investors and
parents with children studying in that country, has fallen about 15%
against the US dollar since mid-April.
However, the currency remains well above where it has been for much of the past two decades, says the
IHT.
The Australian dollar has rallied lately on positive economic data from China.
As new resource investments peter out, the Australian government is
seeking to rebalance its economy, with strength in sectors such as
tourism and manufacturing.
There are diverging trends in the Australian economy, where
unemployment has edged up, with “signs of increased demand for finance
by households”.
However, the pace of borrowing has remained “relatively subdued”.
It will be interesting to watch how the Australian dollar performs
over the next few months and assess whether it is timely to invest in
it.
Plain Speaking By Yap Leng Kuen contributed to this post.
Columnist Yap Leng Kuen sees a lot of investment opportunities in emerging markets.
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