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Global financial update v2

This document discusses whether Asia could see a repeat of the 1997 Asian financial crisis. It argues that Asia is in a much stronger position now than in 1997 for three main reasons: 1. Current account balances have improved substantially across most Asian economies since 1997. This reduces vulnerability to capital outflows. 2. Foreign exchange reserves are at much higher levels relative to GDP compared to 1997. This provides a larger buffer against currency weakness. 3. Dependence on external debt, particularly short-term debt, has fallen significantly. Balance sheets now have less currency and duration mismatch compared to 1997. Additionally, most Asian currencies now have more flexible exchange rate regimes compared to the fixed pegs that exacerbated the crisis

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WANT TO KNOW FUTURE? SURE. SEPTEMBER 11, 2013 TI EM SPECIAL REPORT: THE POPULARITY OF CWM DESIGNATION CHARTERED WEALTH MANAGER FELLOWSHIP DINNERSEPTEMBER 11, 2013 MANILA, PHP
2011.
2012.
19th November 2012 18th January 2013 On November 6 2012, Obama became the first Democratic president since Franklin D. Roosevelt to twice win the majority of the popular vote and being elected as President.
2013.
2013 unfolds with Taliban story …… Burma and then to Europe.
February & March … was consumed with Pope and issues around church
April …mixed bag
May …Japan, Gen Y
June from tornado ..to china …to informers
July … a twist. Buddhist Terror. Happiness. Back to Egypt.
August & September …. As it unfolds
Cyprus Spain Greece Italy Portugal India Indonesia Australia Brazil Currency China Russia Japan UK Ireland
PIGS PIGS Portugal | Italy | Greece | Spain
PIGS PIGS Portugal | Italy | Greece | Spain PIIGS Portugal | Italy | Ireland | Greece | Spain
PIGS PIGS Portugal | Italy | Greece | Spain PIIGS Portugal | Italy | Ireland | Greece | Spain PIIGGS Portugal | Italy | Ireland | Greece | Great Britain | Spain
BRIC Brazil | Russia | India | China
BRIC Brazil | Russia | India | China BRICS Brazil | Russia | India | China | South Africa
High Deficit Economies STUPID Spain | Turkey | UK | Portugal | Italy | Dubai
Six favored emerging markets CIVETS Colombia | Indonesia | Vietnam | Egypt | Turkey | South Africa
Rising Stars NEXT 11 Bangladesh | Egypt | Indonesia | Iran | Mexico | Nigeria | Pakistan | Philippines | South Korea | Turkey | Vietnam.
VIEWS 6INVESTMENT 1997 AGAIN? ASIA The recent sharp sell-off in emerging market (EM) debt and currencies has raised investor concerns that Asia could see a repetition of the financial crisis in 1997–1998.
NO 1997 AGAIN? ASIA Will Asia see a repetition of the 1997 financial crisis?
WHY? 1997 AGAIN? ASIA
ASIA IS IN MUCH BETTER SHAPE NOW THAN IN 1997
ASIA IS IN MUCH BETTER SHAPE NOW THAN IN 1997 Improvement in current account balances Higher level of foreign exchange reserves Lower dependence on external debt More flexible currency regimes
IMPROVEMENT IN CURRENT ACCOUNT BALANCES HOW DOES IT HELP ? Current Account Balance Net of ‘Exported’ and ‘Imported’ goods and services, plus the net flow of income from investments and employment. A country that runs a current account deficit (CAD) will experience a net outflow of domestic capital to pay for imports, unless it is able to finance the deficit by attracting foreign investments. financial fundamentals of most Asian economies have seen a substantial improvement since 1997 (Figure 1). More specifically, there have been some positive developments since 1997, which have helped to significantly reduce Asia’s external vulnerability. (1) Substantial improvement in current account balances – One basic measure of the health of a country's Figure 1 Sharp improvement in current account balances of most Asian economies since the 1997 Asian financial crisis -10 -5 0 5 10 15 20 IN ID TH HK CN MY PH KR TW SG 1996 2013F Current account (% of GDP) Source: IMF World Economic Outlook Database April 2013, Credit Suisse vulnerable to capital outflows, while Ch and the Philippines are least vulnerable.  We favor Asian equity markets with str external balances and FX reserves and s overweight on Taiwan and Hong Kong. see tactical opportunities in China due to strong surpluses and growth stabilization  We underweight equities in Indonesia India, given their high external vulnerab We remain negative on the IDR and INR and avoid local currency bonds in th two countries. Top investment ideas FX: Stay negative on the IDR and the INR, with and 12M USD/IDR forecasts at 11,000 and 11 and 3M and 12M USD/INR forecasts at 66.0 a 68.0, respectively. We are positive on the CNY forecast USD/CNY at 6.10 in 3M and 6.00 in 1 One basic measure of the health of a country's external balance is the current account balance. 1
POINT §  Balance of payments (BoP) in India, Indonesia, Malaysia and Thailand have deteriorated markedly in recent years. §  Strong domestic demand in these countries has led to higher import requirements, while exports have been sluggish due to weak demand in G3 markets. §  Foreign direct investments (FDI) in Malaysia and Thailand have slowed, while residents have become more active in investing overseas. §  Consequently, these countries are more vulnerable to capital outflows due to the smaller buffer provided by the weaker current account.
HIGHER LEVEL OF FX RESERVES HOW DOES IT HELP ? Impart of FX reserve A country with a higher level of FX reserves would be able to more readily supply foreign exchange to the market when capital outflows intensify. The level of foreign exchange (FX) reserves determines the extent to which a country can maintain stability in the value of its currency during times of capital outflows. Singapore and Hong Kong, 3 September 2013 Figure 3 donesia, Malaysia and ears Most Asian economies now have a bigger stock of FX reserves to counter currency weakness 03 05 07 09 11 13 Thailand Malaysia DP 10 13 23 26 29 38 39 40 83 91 107 0 20 40 60 80 100 120 Indonesia India Japan Korea Philippines Thailand China Malaysia Taiwan Singapore Hong Kong Dec-1997 Current in % of GDP Source: DataStream, Bloomberg, Credit Suisse The level of FX reserves (relative to GDP) in most Asian economies has increased significantly since 1997 2
POINT §  The increase in Indonesia and India’s FX reserves has been fairly negligible. §  In the current environment of sluggish export demand and low inflation pressures, some Asian central banks may be willing to allow a modest currency weakness to provide some support to exports and economic growth, and refrain from aggressively intervening to cap the sell-off in currencies.
LOWER DEPENDENCE ON EXTERNAL DEBT HOW DOES IT HELP ? External Debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. One factor which aggravated the negative impact of the Asian Financial Crisis (AFC) was Asian countries’ heavy reliance on external financing. What happened in AFC? ①  In the mid-1990s, Asian companies, banks and governments borrowed heavily in foreign currency terms, assuming the fixed exchange rate regimes would hold. ②  The borrowed money was in turn invested locally, often in projects with longer repayment periods (e.g., in real estate and fixed asset investments). ③  When the AFC unfolded in 1997, international creditors were unwilling to roll over the external debt and demanded their US dollars back, driving a wave of deleveraging and asset liquidation by local borrowers. 3
POINT §  Asia’s dependence on short-term external financing has fallen significantly over the past two decades. §  NOTE - Asia has nonetheless become more dependent on foreign portfolio flows to help finance investment plans. §  Equity investments dominated the 2000s, foreign investors fixed income investments picked up after the 2008 global financial crisis. However, these fixed income investments are mainly dominated in local currency. §  The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. §  As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. §  Reduced duration mismatch. §  Equity Investment; not debt. §  Debt in local CCY. §  Better duration & FX management §  Safer for economy
MORE FLEXIBLE CURRENCY REGIMES HOW DOES IT HELP ? What happened in AFC? ①  Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). ②  These countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy. 4 Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb
POINT §  Most Asian countries now adopt a managed float regime, with varying degrees of currency flexibility across countries. §  Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. §  The increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. §  Managed float vs Fixed pegged exchange rate. §  Greater Flexibility – on top of matter. §  Less complacent
VULNERABILITY & SAFEST ASIA IS MANY MARKETS Which countries are most vulnerable? ①  The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. ②  Investment Research (Credit Suisse) presented an external vulnerability scorecard – that compares the ratio of FX reserve relative to each Asian country’s external financing needs, including the potential risk of portfolio outflows. Summary Singapore and Hong Kong, 3 September 2013 ure 4 Figure 5 an exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows * 00 0 00 00 00 00 00 00 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia SD exchange rate against local currency (1994 = 100) External vulnerability assessment (ratio of FX reserves to potential outflows) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID IN MY TH KR HK SG TW PH CN %
POINT §  India and Indonesia are most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows for both countries is less than 100%. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. Singapore and Hong Kong, 3 September 2013 Figure 5 Ratio of FX reserves to potential capital outflows * External vulnerability assessment (ratio of FX reserves to potential outflows) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID IN MY TH KR HK SG TW PH CN % * Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse §  The next two weakest countries are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries.
POINT §  The two strongest countries are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. §  Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. Singapore and Hong Kong, 3 September 2013 Figure 5 Ratio of FX reserves to potential capital outflows * External vulnerability assessment (ratio of FX reserves to potential outflows) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID IN MY TH KR HK SG TW PH CN % * Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
MAKING THE POINT 4 The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India, adding downside risks to economic and earnings growth. Indonesia entered bear market territory after the Jakarta Composite Index (JCI) corrected 22% from its year-high, together with the sharp depreciation of the IDR against the Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD Performance -20 -15 -10 -5 0 5 Japan Korea China MSCIAsiaPacific Australia HongKong Taiwan MSCIAsiaexJapan Singapore Malaysia Thailand Philippines India Indonesia -17.4 -10.4 -8.2 -7.7 -4.8 -4.2 -4.1 -3.2 -0.1 1.8 -16-15-14-13-12-11-10-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 USD/INR USD/IDR USD/PHP USD/MYR USD/THB USD/SGD USD/KRW USD/TWD USD/HKD USD/CNY % returns YTD Source: Bloomberg, Credit Suisse Source: Bloomberg, Credit Suisse The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India, adding downside risks to economic and earnings growt Indonesia entered bear market territory after the Jakar Composite Index (JCI) corrected 22% from its year-hig together with the sharp depreciation of the IDR against t Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD Performance -20 -15 -10 -5 0 5 Japan Korea China MSCIAsiaPacific Australia HongKong Taiwan MSCIAsiaexJapan Singapore Malaysia Thailand Philippines India Indonesia -17.4 -10.4 -8.2 -7.7 -4.8 -4.2 -4.1 -3.2 -0.1 1.8 -16-15-14-13-12-11-10-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 USD/INR USD/IDR USD/PHP USD/MYR USD/THB USD/SGD USD/KRW USD/TWD USD/HKD USD/CNY % returns YTD Source: Bloomberg, Credit Suisse Source: Bloomberg, Credit Suisse ALTHOUGH THERE ARE VULNERABILITIES; ASIA WILL NOT FACE 1997 AGAIN
VIEWS 6INVESTMENT 1997 AGAIN? ASIA
IDEAS 6INVESTMENT #1 FI: CREDIT, NOT DURATION In view of current economic environment, do not take duration mismatch risk, for conservative investors invest in: §  1-3 years duration (Short dated) §  Good Quality AA- to BBB financials and A to BB non-financials (excluding autos) §  Could consider - CHF, EUR, GBP and USD. §  Cash will give near-zero yields in most markets. §  Debt default rates expected to remain stable in 2014. Corporate bonds of short maturities offers a reasonable yield pick-up versus cash. §  After the recent rise in yields, valuations of medium-term bonds have improved but rate volatility is likely to remain very high. §  Conservative investors should continue to focus on short (1-3 year) investment grade bonds. Fixed Income
IDEAS 6INVESTMENT #2 EQUITIES; TAKE PROFIT §  Global growth is likely to accelerate. §  The US clearly remains the leader of the recovery and exposure to the US is the cornerstone of the recovery theme. §  However, due to increased short-term risks and a strong performance, take profit in US consumer and US recovery stocks. §  European economic data are looking on the positive side. European stocks may start to look increasingly attractive. §  Asia, wait & watch. Equities §  Take profit on US consumer and US recovery stocks. §  Buy M&A stocks. §  Lookout for European Recovery Stocks §  Wait & Watch Asian Equities
IDEAS 6INVESTMENT #3 DIVIDENDS & BEYOND §  A defensive theme for investors who are interested in absolute returns and have expectations of relatively high cash flow disbursements from dividends. §  Fundamental drivers for equity yield remain §  However, due to current market environment, be cautious to Convertibles. §  Consider taking profit on the emerging market and APAC at this time due to increased short-term risks. Equities §  Selectively buy high-dividend- yielding stocks and stocks generating high free cash flow and hold, but do not add to global convertibles.
IDEAS 6INVESTMENT #4 GAS & OIL §  Higher crude oil prices should disproportionately benefit oil and gas companies with new exploration technologies or that have interest in unexploited shale gas, tight oil or deep water oil sources, since these are becoming increasingly attractive and profitable the higher the crude oil price is. §  Due to the volatile market environment, take profit on this high beta idea at this time. Equities §  Take profit on upstream energy stocks.
IDEAS 6INVESTMENT #5 US REAL ESTATE §  US homebuilding stocks and real estate investment trusts (REITs) have underperformed in recent weeks. §  Rising long-term interest rates were the main trigger for the drawdown. §  This sector is expected to provide positive performance, however, real estate is unlikely to outperform overall stock markets in such an environment. §  Selectively, US REITs continue to offer attractive investment opportunities to investors looking for defensive dividends. Alternative Investments §  Exit listed real estate investments.
IDEAS 6INVESTMENT #6 THE NEW HARD CURRENCIES §  In the near term, the high volatility of 10-year US yields is weighing on emerging market currencies. §  An improvement in the external environment and the now higher carry should attract renewed capital inflows. §  CNY still has upside potential, but is nearing a peak. §  Diversify into only a few selected emerging market currencies. Foreign Exchange §  Hold selected emerging market currencies funded in EUR, USD or GBP..
IDEAS 6INVESTMENT ARE GATHERED FROM VARIOUS SOURCES. Investors should NOT consider this presentation as solicitation for any investment products. Aprikot is not involved in any business of selling or buying securities or any investment products. The investment ideas are personal ideas of the presenter, who is not a broker nor a financial advisor. Investments carry risks.

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Global financial update v2

  • 1.
    WANT TO KNOW FUTURE? SURE. SEPTEMBER11, 2013 TI EM SPECIAL REPORT: THE POPULARITY OF CWM DESIGNATION CHARTERED WEALTH MANAGER FELLOWSHIP DINNERSEPTEMBER 11, 2013 MANILA, PHP
  • 3.
  • 6.
  • 10.
    19th November 2012 18thJanuary 2013 On November 6 2012, Obama became the first Democratic president since Franklin D. Roosevelt to twice win the majority of the popular vote and being elected as President.
  • 11.
  • 12.
    2013 unfolds withTaliban story …… Burma and then to Europe.
  • 13.
    February & March… was consumed with Pope and issues around church
  • 14.
  • 15.
  • 16.
    June from tornado..to china …to informers
  • 17.
    July … atwist. Buddhist Terror. Happiness. Back to Egypt.
  • 18.
    August & September…. As it unfolds
  • 19.
  • 21.
  • 22.
    PIGS PIGS Portugal | Italy| Greece | Spain PIIGS Portugal | Italy | Ireland | Greece | Spain
  • 23.
    PIGS PIGS Portugal | Italy| Greece | Spain PIIGS Portugal | Italy | Ireland | Greece | Spain PIIGGS Portugal | Italy | Ireland | Greece | Great Britain | Spain
  • 24.
    BRIC Brazil | Russia| India | China
  • 25.
    BRIC Brazil | Russia| India | China BRICS Brazil | Russia | India | China | South Africa
  • 26.
    High Deficit Economies STUPID Spain |Turkey | UK | Portugal | Italy | Dubai
  • 27.
    Six favored emergingmarkets CIVETS Colombia | Indonesia | Vietnam | Egypt | Turkey | South Africa
  • 28.
    Rising Stars NEXT 11 Bangladesh| Egypt | Indonesia | Iran | Mexico | Nigeria | Pakistan | Philippines | South Korea | Turkey | Vietnam.
  • 29.
    VIEWS 6INVESTMENT 1997 AGAIN? ASIA The recentsharp sell-off in emerging market (EM) debt and currencies has raised investor concerns that Asia could see a repetition of the financial crisis in 1997–1998.
  • 30.
    NO 1997 AGAIN? ASIA Will Asiasee a repetition of the 1997 financial crisis?
  • 31.
  • 32.
    ASIA IS INMUCH BETTER SHAPE NOW THAN IN 1997
  • 33.
    ASIA IS INMUCH BETTER SHAPE NOW THAN IN 1997 Improvement in current account balances Higher level of foreign exchange reserves Lower dependence on external debt More flexible currency regimes
  • 34.
    IMPROVEMENT IN CURRENTACCOUNT BALANCES HOW DOES IT HELP ? Current Account Balance Net of ‘Exported’ and ‘Imported’ goods and services, plus the net flow of income from investments and employment. A country that runs a current account deficit (CAD) will experience a net outflow of domestic capital to pay for imports, unless it is able to finance the deficit by attracting foreign investments. financial fundamentals of most Asian economies have seen a substantial improvement since 1997 (Figure 1). More specifically, there have been some positive developments since 1997, which have helped to significantly reduce Asia’s external vulnerability. (1) Substantial improvement in current account balances – One basic measure of the health of a country's Figure 1 Sharp improvement in current account balances of most Asian economies since the 1997 Asian financial crisis -10 -5 0 5 10 15 20 IN ID TH HK CN MY PH KR TW SG 1996 2013F Current account (% of GDP) Source: IMF World Economic Outlook Database April 2013, Credit Suisse vulnerable to capital outflows, while Ch and the Philippines are least vulnerable.  We favor Asian equity markets with str external balances and FX reserves and s overweight on Taiwan and Hong Kong. see tactical opportunities in China due to strong surpluses and growth stabilization  We underweight equities in Indonesia India, given their high external vulnerab We remain negative on the IDR and INR and avoid local currency bonds in th two countries. Top investment ideas FX: Stay negative on the IDR and the INR, with and 12M USD/IDR forecasts at 11,000 and 11 and 3M and 12M USD/INR forecasts at 66.0 a 68.0, respectively. We are positive on the CNY forecast USD/CNY at 6.10 in 3M and 6.00 in 1 One basic measure of the health of a country's external balance is the current account balance. 1
  • 35.
    POINT §  Balance ofpayments (BoP) in India, Indonesia, Malaysia and Thailand have deteriorated markedly in recent years. §  Strong domestic demand in these countries has led to higher import requirements, while exports have been sluggish due to weak demand in G3 markets. §  Foreign direct investments (FDI) in Malaysia and Thailand have slowed, while residents have become more active in investing overseas. §  Consequently, these countries are more vulnerable to capital outflows due to the smaller buffer provided by the weaker current account.
  • 36.
    HIGHER LEVEL OFFX RESERVES HOW DOES IT HELP ? Impart of FX reserve A country with a higher level of FX reserves would be able to more readily supply foreign exchange to the market when capital outflows intensify. The level of foreign exchange (FX) reserves determines the extent to which a country can maintain stability in the value of its currency during times of capital outflows. Singapore and Hong Kong, 3 September 2013 Figure 3 donesia, Malaysia and ears Most Asian economies now have a bigger stock of FX reserves to counter currency weakness 03 05 07 09 11 13 Thailand Malaysia DP 10 13 23 26 29 38 39 40 83 91 107 0 20 40 60 80 100 120 Indonesia India Japan Korea Philippines Thailand China Malaysia Taiwan Singapore Hong Kong Dec-1997 Current in % of GDP Source: DataStream, Bloomberg, Credit Suisse The level of FX reserves (relative to GDP) in most Asian economies has increased significantly since 1997 2
  • 37.
    POINT §  The increasein Indonesia and India’s FX reserves has been fairly negligible. §  In the current environment of sluggish export demand and low inflation pressures, some Asian central banks may be willing to allow a modest currency weakness to provide some support to exports and economic growth, and refrain from aggressively intervening to cap the sell-off in currencies.
  • 38.
    LOWER DEPENDENCE ONEXTERNAL DEBT HOW DOES IT HELP ? External Debt External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. One factor which aggravated the negative impact of the Asian Financial Crisis (AFC) was Asian countries’ heavy reliance on external financing. What happened in AFC? ①  In the mid-1990s, Asian companies, banks and governments borrowed heavily in foreign currency terms, assuming the fixed exchange rate regimes would hold. ②  The borrowed money was in turn invested locally, often in projects with longer repayment periods (e.g., in real estate and fixed asset investments). ③  When the AFC unfolded in 1997, international creditors were unwilling to roll over the external debt and demanded their US dollars back, driving a wave of deleveraging and asset liquidation by local borrowers. 3
  • 39.
    POINT §  Asia’s dependenceon short-term external financing has fallen significantly over the past two decades. §  NOTE - Asia has nonetheless become more dependent on foreign portfolio flows to help finance investment plans. §  Equity investments dominated the 2000s, foreign investors fixed income investments picked up after the 2008 global financial crisis. However, these fixed income investments are mainly dominated in local currency. §  The important factor is that the degree of duration and currency mismatch in local corporate and official balance sheets has fallen significantly. §  As such, the real economic impact of a reversal of capital flows will likely be smaller compared to 1997. §  Reduced duration mismatch. §  Equity Investment; not debt. §  Debt in local CCY. §  Better duration & FX management §  Safer for economy
  • 40.
    MORE FLEXIBLE CURRENCYREGIMES HOW DOES IT HELP ? What happened in AFC? ①  Prior to the AFC, economies such as Thailand, Indonesia and South Korea adopted fixed exchange rate regimes (i.e., exchange rates were fixed against the USD). ②  These countries were forced to abort their exchange rate pegs abruptly in 1997 due to the depletion of FX reserves, the values of their currencies plunged rapidly, sending severe shocks through financial markets and the real economy. 4 Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb Figure 4 Figure 5 Asian exchange rates around the 1997 financial crisis Ratio of FX 700 0 100 200 300 400 500 600 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia USD exchange rate against local currency (1994 = 100) External v 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID % Source: Bloomberg, DataStream, Credit Suisse * Refer to Table 1 Source: Bloomb
  • 41.
    POINT §  Most Asiancountries now adopt a managed float regime, with varying degrees of currency flexibility across countries. §  Greater flexibility in exchange rates – even if they are subject to active intervention by local authorities – should act as shock absorbers to cushion changes in capital flows and external financing conditions. §  The increased two-way movement of exchange rates over time means businesses in Asia are less complacent about currency risks and it has also encouraged better currency hedging practices. §  Managed float vs Fixed pegged exchange rate. §  Greater Flexibility – on top of matter. §  Less complacent
  • 42.
    VULNERABILITY & SAFEST ASIAIS MANY MARKETS Which countries are most vulnerable? ①  The expected tapering of the US Federal Reserve's quantitative easing (QE) program has led to rising US bond yields and a reversal of the QE-driven liquidity flows into EM assets in recent years. ②  Investment Research (Credit Suisse) presented an external vulnerability scorecard – that compares the ratio of FX reserve relative to each Asian country’s external financing needs, including the potential risk of portfolio outflows. Summary Singapore and Hong Kong, 3 September 2013 ure 4 Figure 5 an exchange rates around the 1997 financial crisis Ratio of FX reserves to potential capital outflows * 00 0 00 00 00 00 00 00 94 95 96 97 98 99 Indonesia Korea Thailand Malaysia SD exchange rate against local currency (1994 = 100) External vulnerability assessment (ratio of FX reserves to potential outflows) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID IN MY TH KR HK SG TW PH CN %
  • 43.
    POINT §  Indiaand Indonesia are most vulnerable countries in Asia – the ratio of FX reserves to potential capital outflows for both countries is less than 100%. This implies that these two countries do not have enough FX reserves to maintain a stable currency in the event that external financing conditions worsen and capital flight intensifies. Singapore and Hong Kong, 3 September 2013 Figure 5 Ratio of FX reserves to potential capital outflows * External vulnerability assessment (ratio of FX reserves to potential outflows) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID IN MY TH KR HK SG TW PH CN % * Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse §  The next two weakest countries are Malaysia and Thailand, although the ratio of FX reserves to outflows in these countries is higher at 137% and 227%, respectively. However, they remain weak compared to most other Asian countries.
  • 44.
    POINT §  The twostrongest countries are China and the Philippines, whose FX reserves are more than or nearly ten times the size of potential capital outflows. §  Taiwan, Singapore and Hong Kong are also relatively well protected against external contagion, given their relatively high ratios of 449%, 426% and 331%, respectively. Singapore and Hong Kong, 3 September 2013 Figure 5 Ratio of FX reserves to potential capital outflows * External vulnerability assessment (ratio of FX reserves to potential outflows) 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 ID IN MY TH KR HK SG TW PH CN % * Refer to Table 1 for a detailed analysis of our external vulnerability assessment. Source: Bloomberg, Datastream, Credit Suisse
  • 45.
    MAKING THE POINT 4 Thelatest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India, adding downside risks to economic and earnings growth. Indonesia entered bear market territory after the Jakarta Composite Index (JCI) corrected 22% from its year-high, together with the sharp depreciation of the IDR against the Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD Performance -20 -15 -10 -5 0 5 Japan Korea China MSCIAsiaPacific Australia HongKong Taiwan MSCIAsiaexJapan Singapore Malaysia Thailand Philippines India Indonesia -17.4 -10.4 -8.2 -7.7 -4.8 -4.2 -4.1 -3.2 -0.1 1.8 -16-15-14-13-12-11-10-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 USD/INR USD/IDR USD/PHP USD/MYR USD/THB USD/SGD USD/KRW USD/TWD USD/HKD USD/CNY % returns YTD Source: Bloomberg, Credit Suisse Source: Bloomberg, Credit Suisse The latest market data show that redemptions from EM bond funds have averaged around USD 150 million per day in recent weeks, with EM currencies of the larger indebted and deficit countries being the hardest hit, including India, adding downside risks to economic and earnings growt Indonesia entered bear market territory after the Jakar Composite Index (JCI) corrected 22% from its year-hig together with the sharp depreciation of the IDR against t Figure 6 Figure 7 MSCI Asia Pacific performance since 31 May (in USD) YTD performance of Asian currencies against USD Performance -20 -15 -10 -5 0 5 Japan Korea China MSCIAsiaPacific Australia HongKong Taiwan MSCIAsiaexJapan Singapore Malaysia Thailand Philippines India Indonesia -17.4 -10.4 -8.2 -7.7 -4.8 -4.2 -4.1 -3.2 -0.1 1.8 -16-15-14-13-12-11-10-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 USD/INR USD/IDR USD/PHP USD/MYR USD/THB USD/SGD USD/KRW USD/TWD USD/HKD USD/CNY % returns YTD Source: Bloomberg, Credit Suisse Source: Bloomberg, Credit Suisse ALTHOUGH THERE ARE VULNERABILITIES; ASIA WILL NOT FACE 1997 AGAIN
  • 46.
  • 47.
    IDEAS 6INVESTMENT #1 FI: CREDIT, NOTDURATION In view of current economic environment, do not take duration mismatch risk, for conservative investors invest in: §  1-3 years duration (Short dated) §  Good Quality AA- to BBB financials and A to BB non-financials (excluding autos) §  Could consider - CHF, EUR, GBP and USD. §  Cash will give near-zero yields in most markets. §  Debt default rates expected to remain stable in 2014. Corporate bonds of short maturities offers a reasonable yield pick-up versus cash. §  After the recent rise in yields, valuations of medium-term bonds have improved but rate volatility is likely to remain very high. §  Conservative investors should continue to focus on short (1-3 year) investment grade bonds. Fixed Income
  • 48.
    IDEAS 6INVESTMENT #2 EQUITIES; TAKE PROFIT § Global growth is likely to accelerate. §  The US clearly remains the leader of the recovery and exposure to the US is the cornerstone of the recovery theme. §  However, due to increased short-term risks and a strong performance, take profit in US consumer and US recovery stocks. §  European economic data are looking on the positive side. European stocks may start to look increasingly attractive. §  Asia, wait & watch. Equities §  Take profit on US consumer and US recovery stocks. §  Buy M&A stocks. §  Lookout for European Recovery Stocks §  Wait & Watch Asian Equities
  • 49.
    IDEAS 6INVESTMENT #3 DIVIDENDS & BEYOND § A defensive theme for investors who are interested in absolute returns and have expectations of relatively high cash flow disbursements from dividends. §  Fundamental drivers for equity yield remain §  However, due to current market environment, be cautious to Convertibles. §  Consider taking profit on the emerging market and APAC at this time due to increased short-term risks. Equities §  Selectively buy high-dividend- yielding stocks and stocks generating high free cash flow and hold, but do not add to global convertibles.
  • 50.
    IDEAS 6INVESTMENT #4 GAS & OIL § Higher crude oil prices should disproportionately benefit oil and gas companies with new exploration technologies or that have interest in unexploited shale gas, tight oil or deep water oil sources, since these are becoming increasingly attractive and profitable the higher the crude oil price is. §  Due to the volatile market environment, take profit on this high beta idea at this time. Equities §  Take profit on upstream energy stocks.
  • 51.
    IDEAS 6INVESTMENT #5 US REAL ESTATE § US homebuilding stocks and real estate investment trusts (REITs) have underperformed in recent weeks. §  Rising long-term interest rates were the main trigger for the drawdown. §  This sector is expected to provide positive performance, however, real estate is unlikely to outperform overall stock markets in such an environment. §  Selectively, US REITs continue to offer attractive investment opportunities to investors looking for defensive dividends. Alternative Investments §  Exit listed real estate investments.
  • 52.
    IDEAS 6INVESTMENT #6 THE NEW HARDCURRENCIES §  In the near term, the high volatility of 10-year US yields is weighing on emerging market currencies. §  An improvement in the external environment and the now higher carry should attract renewed capital inflows. §  CNY still has upside potential, but is nearing a peak. §  Diversify into only a few selected emerging market currencies. Foreign Exchange §  Hold selected emerging market currencies funded in EUR, USD or GBP..
  • 53.
    IDEAS 6INVESTMENT ARE GATHERED FROMVARIOUS SOURCES. Investors should NOT consider this presentation as solicitation for any investment products. Aprikot is not involved in any business of selling or buying securities or any investment products. The investment ideas are personal ideas of the presenter, who is not a broker nor a financial advisor. Investments carry risks.