Asia Should Think Twice Before Cheering Fed’s Decision; Fed Can’t Taper Over India’s Cracks

September 19, 2013, 5:25 AM

Asia Should Think Twice Before Cheering Fed’s Decision

By Ewen Chew

At first glance, the Federal Reserve’s surprise decision to postpone a highly anticipated reduction in its bond-buying program is good news for Asian markets. But reading between the lines, the Fed clearly feels the U.S. economy isn’t improving as expected, and might actually be priming markets for tougher times ahead. If so, the impact won’t be limited to America, but will affect Asia’s export-oriented economies and capital-hungry markets as well.Despite its recent emphasis on growing the service sector and encouraging domestic consumption, China remains heavily reliant on export manufacturing. A slowdown in China’s growth would take a toll on Taiwan first, but also South Korea, Malaysia, Australia and Japan – all of which depend on China to take a good portion of their own exports.

Much of Asia still depends on inflows from developed nations for foreign direct investment – but for that, companies must feel optimistic enough to expand their overseas production facilities. Since U.S. quantitative easing began in 2009, Malaysia has been one of the biggest beneficiaries of foreign inflows, followed by Thailand, the Philippines, Indonesia and Singapore.

The fear of a sudden stop of capital inflows into Asia has been one of the main reasons for the selloff in emerging-market assets since Mr. Bernanke first floated the idea of tapering in May. Countries such as Indonesia and India have hiked interest rates in an attempt to forestall further outflows, but those moves had only a marginal impact compared to Thursday’s reversal in bond yields after the Fed decided to hold off tapering.

Still, whether foreign flows to Asia continue may depend on a sustained U.S. economic recovery taking root. Inflows could slow to a trickle if the U.S. economy slips up again.

The expected tapering of monetary stimulus was always contingent on a number of factors: job creation, housing prices and inflation. These variables have not been performing to expectations of late.

One of the concerns Fed Chairman Ben Bernanke mentioned in the FOMC statement is that U.S. fiscal policy could restrain economic growth. A failure to raise the U.S. debt ceiling could have cascading effects on the economy, crimping the Fed’s ability to stimulate the economy.  That might be the reason the Fed is trying to pump prime the economy now by buying more Treasurys while it still can.

Asian markets on Thursday greeted the Fed’s decision with a resounding cheer. But policy makers and market players might do well to think a bit more about what the Fed is really saying.


September 19, 2013, 8:50 a.m. ET

Fed Can’t Taper Over India’s Cracks


Ben Bernanke is easing headaches for emerging-market policy makers. But unless these officials tackle their economies’ underlying problems, relief will be temporary.

Emerging markets were hammered after the Federal Reserve chairman hinted on May 22 he would scale back the central bank’s bond purchases. Investors homed in on India and Indonesia, economies with fundamental issues like low savings and high inflation, and heavy reliance on foreign capital inflows. Central banks there were forced to tighten liquidity to defend their currencies, while politicians promised structural reforms.

Now, Mr. Bernanke’s hesitation to moderate the Fed’s bond-buying takes some pressure off these markets.

Take India. In the months after the Fed suggested it would pull back, the rupee was the world’s worst performing major currency. On Thursday, though, it rose more than 2%. Indian stocks rallied more than 3%.

The eyes of Indian investors now turn to the country’s own policy makers—especially the new chief of the Reserve Bank of India, Raghuram Rajan. Mr. Rajan was supposed to deliver his first policy statement Wednesday, but delayed his statement till Friday, suggesting he was watching the Fed for cues.

Following the Fed’s non-tapering, Mr. Rajan can afford to keep the RBI’s benchmark rate steady for now. With less downward pressure on the rupee, he may even relax some of the liquidity-tightening steps the RBI took in July, says Kotak Securities.

That wouldn’t solve India’s underlying problem of high inflation and low savings. Consumer-price inflation has averaged more than 9% for the last five years—it clocked 9.5% in August. That compares with an average of less than 5% between 2003 and 2007, according to World Bank data.

Inflation has soared largely because the RBI has kept interest rates too low. Rate increases during 2010-11 were inadequate, and the central bank reversed that course last year. Adjusted for consumer-price inflation, real rates have been negative for most of the last five years, says Morgan Stanley. Over the same period, India’s national savings rate has fallen by six percentage points while its current-account deficit has widened.

Without higher rates and other structural reforms, India will remain exposed to any eventual policy tightening from the Fed. Mr. Bernanke says the Fed will scale back its bond-buying once economic data shows improvement. The RBI could get ahead of this by starting its own tightening later this year.

If the RBI does nothing, the Fed will continue to set the Indian agenda. When the Fed eventually withdraws relief, the RBI may have little choice but to tighten to defend the rupee—just not at its own time or pace.


September 18, 2013, 10:32 PM

Fed Gives Breathing Room to Asian Economies


The U.S. Federal Reserve’s surprise decision not to pull back on a $85 billion monthly bond-buying program provides some respite to Asian economies that have been under pressure due to concerns about an end to U.S. easy-money policies.

Barclays Capital, in a note, points out that Asian countries with large current account deficits – notably India and Indonesia – could see the most short-term benefit to their currencies, bonds and stocks from the Fed’s decision to leave its extraordinary monetary policies in place.

Both these nations have faced massive selling of their currencies and have had to offer investors much higher rates to borrow money since the Fed intimated in late May it would soon begin winding down its bond buying.

That’s because investors, anticipating higher U.S. rates, began to reduce their exposure to more-risky emerging markets. India and Indonesia – along with Brazil and Turkey – were especially vulnerable because they import more than they export, making them reliant on foreign capital inflows to fund the deficit.

The Fed’s latest actions “may foster expectations that capital outflows from EM can stop or even reverse,” Barclays said. “This should be particularly supportive for the currencies and rates markets of countries with higher current account deficits.”

Both India and Indonesia have tightened monetary policy in recent weeks in an attempt to stop the outflows. Investors may now start to think more monetary tightening – which risked further squeezing economic growth – may not be necessary.

“Some of the priced-in expectations of aggressive monetary tightening may be unwound,” Barclays said.

U.S. Treasurys rallied on the Fed news, pushing down yields, giving emerging markets some breathing room. Gold spot prices traded in New York jumped 4% on the news. The U.S. dollar lost ground against major currencies.

Asian markets rallied Thursday. Malaysia’s ringgit rose 2%, the Indonesian rupiah was 1.7% higher, and the Thai baht up 2.1% – but still way down from their levels at the start of 2013.

Jakarta’s JSX Composite Index opened 7% higher before settling at levels 4% over Wednesday’s close. Japan’s Nikkei stock index was 1.1% higher and Australia’s S&P ASX 200 rose 1.1%.

Indonesia’s 10-year government bond was yielding 7.90% down from 8.16% before the Fed’s decision. That’s much lower than yields of almost 9% earlier this month, and makes it easier for the country to fund a large budget deficit.

The Indian rupee was at 61.84 to the U.S. dollar, a five-week high, and much stronger than a record low of over 68 late last month.

“The biggest beneficiaries will be Asian currencies,” said Credit Agricole. “While the Fed has merely delayed tapering this will not stop markets from following through on the positive dynamic today. The positive tone will be reinforced across Asian and European markets.”

But there’s a downside, too. Some observers said the Fed’s surprise move – a result of concern that a recovery in U.S. jobs is not as strong as some would like – will take the pressure off Asian economies to institute much-needed reforms to their economies.

India and Indonesia were punished in the recent sell-off as they failed to use the massive inflows of capital following the 2008 global recession to make their economies more efficient and bring budget deficits under control. Much of the inflows went on consumption, exacerbating trade deficits.

Others said the Fed – also spooked by a massive sell-off in emerging markets since the summer – has only delayed a reduction in its bond-buying until later this year.

“The market got a huge sugar rush,” said Kit Juckes of Societe Generale. “On the downside we are going to have to do it all over again soon. The sooner taper starts the sooner the world can move on.”

Barclays says it now expects the Fed to reduce its bond buying in December, at which time Asian economies could feel the pain all over again if they don’t take steps to cut debt and open their economies to more investment.

About bambooinnovator
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 (, 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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