No Bollywood ending for the rupee, down 16 per cent since the start of May; in 1997 the Thai baht more than halved in six months

August 20, 2013 Leave a comment

August 19, 2013 7:47 pm

No Bollywood ending for the rupee

By James Mackintosh

India exposed as fears grow that the Fed will reduce cash flow

Raghuram Rajan, the new Indian central bank governor, has an impressive pedigree. But investors wanting to know the direction of India’s rupee would probably be better off watching Ben Bernanke and his successor as chairman of the US Federal Reserve. The rupee, with Brazil’s real, has led the emerging market sell-off since talk of the Fed “tapering” its bond purchases began in May. This makes perfect sense, since the Fed’s attempt to flood US markets saw large amounts of cash spill over into emerging markets. As fears grow that Mr Bernanke will reduce the flow, the countries with the biggest current account deficits – Brazil, India, South Africa and Indonesia, among others – have been hit the hardest.The scale of the sell-off is scary, with the rupee down 16 per cent since the start of May. Still, this is far from a full-blown emerging market crisis: in 1997 the Thai baht more than halved in six months.

Rather, the rupee and other emerging markets are suffering in parallel with the losses on US Treasury bonds (albeit to a larger extent). While developed equity and corporate bond markets have the prospect of higher growth to offset higher rates, emerging equity, bond and currency markets merely see capital outflows.

Investors on the losing end of this trade should take heart: the odds of a pause in the sell-off are rising. True, if US growth improves and the Fed moves rapidly to end bond purchases, 10-year yields should go up a lot more from their current 2.89 per cent.

But holders of the 10-year have already lost almost 10 per cent, including coupons, since the start of May. In the past 30 years, bond losses have been bigger in such a short period only in the build-up to the 1987 crash and in 1994’s rate shock.

After such a hefty drop a break in selling is overdue. It may not be time for a big bet on either bonds or the emerging world, but taking profits on bets against them looks like a smart move.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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