ADVERTISEMENT

Crises – good times to make money


Euro conundrum: File photo of the euro sculpture in front of the European Central Bank in Frankfurt. Italy’s political turmoil has roiled global financial markets this week and raised questions about the country’s future as a member of Europe’s shared currency, the euro. Some in Italy and other countries in the 19-member currency union have complained about the euro, saying it has made life tougher economically. — AP

Euro conundrum: File photo of the euro sculpture in front of the European Central Bank in Frankfurt. Italy’s political turmoil has roiled global financial markets this week and raised questions about the country’s future as a member of Europe’s shared currency, the euro. Some in Italy and other countries in the 19-member currency union have complained about the euro, saying it has made life tougher economically. — AP

NEVER waste a good “crisis”. When stocks are flashing red, it isn’t time to fret. These are the best times to make money over the long term.

Use the negative global sentiments, now averted on Italy’s political woes; as an opportunity to accumulate stocks.

Most investors are reactionary and have short-term memories.

They cry wolf and feel the world really is coming to an end whenever the media splashes large hyperbole headlines.

Two years ago, on June 24, 2016, when Brexit happened, the Dow Jones Industrial Average tumbled 611 points, or 3.4%, to close at 17,400 that day. That was its worst drop in 10 months.

The market rebounded the following week. By July 8, the Dow had rallied and was back to trading at pre-Brexit levels – it closed the day at 18,147 points.

So this time, when the Italian furore unfolded, it was almost funny to see the same psychology come out.

This time, financial markets roiled only for a day.

Higher risks: Chow says market risks have increased and impacted the emerging market space.

On Tuesday, global markets were uniformly spooked by Italy’s political worries.

For some background, a March election in Italy had failed to produce a conclusive result, leading to weeks of horse trading. Over the weekend, the anti-establishment 5 Start Movement and far-right League, a pair of euroskeptic parties who had agreed to work together, were on the verge of forming a coalition government.

Then suddenly Italy’s President Sergio Mattarella halted the choice of a euroskeptic economy minister, appointing instead a new prime minister who isn’t expected to garner the parliamentary support needed to form a long-term government.

That would mean a new round of elections later this year.

Investors were alarmed that elections could see the anti-establishment parties adopt more forceful tones, potentially turning the vote into a de facto referendum on the country’s euro membership.

Prior to that, Italian bond yields surged and globally markets fell.

Then almost as quickly, European markets stabilised on Wednesday after a regular Italian bond auction proved better than feared. The euro recovered much of its previous losses with a 0.8% climb against the greenback to US$1.162.

Italian bond yields fell across the board Wednesday.

On Wednesday morning, the Italian Treasury sold €5.6bil in 5-, 7- and 10-year debt at the auction.

New PM: Conte at the Quirinale presidential palace after a meeting with the Italian president. He was appointed Italy’s new prime minister. — AFP
New PM: Conte at the Quirinale presidential palace after a meeting with the Italian president. He was appointed Italy’s new prime minister. — AFP

On Thursday, Italian President Sergio Mattarella reappointed Guiseppe Conte as prime minister-designate to lead the government. Thus, fears of another round of elections are now gone.

Nonetheless based on Tuesday’s sell-off, this sale would appear ill timed.

With rising yields and Italy’s debt load risking the country’s creditworthiness, why would bond buyers want to step in and help with this round of refinancing?

Yet shockingly when all was over, the Italian auctions were oversubscribed.

“Actually, the 10-year auction had its highest bid-to-cover ratio (1.48 bids per bond sold) this year, suggesting higher yields attracted demand. Imagine that. The resulting yields (3.0% on the 10-year) are higher than a month ago for sure, but they are a far cry from the 7.56% yield Italy auctioned 10-year debt at in November 2011, at the debt crisis’s height,” says Fisher Investments Marketminder.

It adds that the five-year debt sold partly refinanced a May 2013 issue at a lower rate (2.32% versus 3.01%). Similarly, a decade ago, Italy was issuing 10-year debt at yields north of 5%.

Fisher Investments Market-minder says: “If Italy didn’t default or require a bailout when it was financing itself at higher rates – nearly double in the case of 10-year debt – is there a valid reason to think of today’s rates risk default?”

Use this crisis as a chance to buy in Malaysia

Recently there has been much furore about the FBM KLCI tanking due to the new measures implemented by the new government.

This was heightened when the FBM KLCI index plunged 56.56 points, or more than 3% on Wednesday, the day which also coincided with the Italian bond crisis. This was the biggest one day loss for the FBM KLCI since October 2008.

As with every new government taking over an economy, the kitchen sinking has to happen first.

Investors are fearful especially with the amount of foreign funds exiting the country since GE14 - some RM130bil to RM150bil for now.

Based on what the people of Malaysia now know, the real finances of the country are a lot worse than what we thought it was.

The budget deficit will worsen with almost immediate zero rating of the GST, and a three month delayed SST implementation and higher expenditure (toll reduction, fuel subsidy).

Malaysia earned some RM42bil from GST back in 2017. A three month tax holiday would roughly translate to RM10bil loss of revenue for that period.

“Reform policies are good for the country. The new government needs to clean up first. They have to take away the excesses and put the house in order. Once this is done, then the market will be able to run, The market will always run first,” said one observer.

This observer is very positive on Pakatan Harapan’s new measures and thinks that now is the best to time to buy invest in the market.

Presidential address: Mattarella addressing journalists after Italy’s newly appointed prime minister announced the list of his cabinet at the Quirinale presidential palace on Thursday in Rome. — AFP
Presidential address: Mattarella addressing journalists after Italy’s newly appointed prime minister announced the list of his cabinet at the Quirinale presidential palace on Thursday in Rome. — AFP

“All this while, our market has been a very controlled market. We don’t go up very much, and we don’t go down very much either. It is our government institutions controlling the market.

“The bigger picture is that only with real reforms, will we be able to attract longer term foreign money. To attract big money, we must have very quality and capable leaders. Only such people will be able to produce results which will give comfort and hence enable longer term funds to invest in us,” he adds.

According to MIDF Research, foreign funds remained in selling mode in Asia for the 10th straight week as of last week, although at a tapered pace. Based on the provisional aggregate data for the seven Asian exchanges that MIDF tracks, investors classified as “foreign” disposed of US$581.6mil net last week, less than half the amount sold in the preceding week.

Meanwhile, foreign outflows from stocks listed on Bursa continued for the fifth consecutive week.

On Wednesday, foreign funds sold RM609.2mil net of local stocks, after dumping more than RM892.5mil net the week before

Emerging markets aren’t in trouble

Certainly many now fear that emerging markets are about to suffer especially with the Fed on its rate hike path. The 10 year treasury yield now steadily sits at the 3% level, from its low of 1.6% in July 2016.

Globally, emerging market funds have seen capital outflows in May predominantly because of the rising dollar.

Why would a fund want to invest in the riskier emerging market when they can invest in a lower risk US asset at a higher yield?

The fear of emerging markets facing a backlash comes predominantly from Argentina and Turkey.

Both countries have responded sharply by increasing their interest rates.

Argentina raised its key lending rate to 40% while Turkey increased its rates to 16.5%.

Furthermore financial wise, both countries are burdened extremely low foreign exchange reserves in comparison to their foreign currency denominated debt. This is especially evident in Turkey, where its foreign debt is more than 3 times its foreign reserves.

“Market risks have increased and impacted the emerging market space. Flip-flopping by President Trump on trade, stronger US dollar and geopolitical risk concerning Italian elections that has been taken as a de facto referendum on its membership in the EU have pressured global markets,” said Chow Kar Tzen, associate director, equities, Affin Hwang Asset Management said that the MSCI Asia Ex Japan is down by 1.6% year to date in US dollar terms and 3.4% in ringgit terms (as at May 31).

“But from a bottom-up basis, earnings grew 23.5% in US (of which 10% came from tax cut) and 9.4% in Asia for the first quarter of 2018. These are still healthy levels.

Asian markets are currently trading at 12.3x forward price earnings ratio, which is at its long-term mean.

“This is reasonable at this stage of the market cycle. From a positioning perspective, global funds are massively underweighted in Asia and thus serves as a contrarian signal,” says Chow.

Fisher Investments Market-Minder agrees.

“Argentina and Turkey are fighting currency runs for domestic reasons – the former has been a basket case for most of the current century after being locked out of international capital markets in 2001. The latter has been inching closer and closer to an authoritarian-style government.

Both countries’ goverments seemingly called their central banks’ independence into question, spurring investor fears of hot inflation and monetary policy errors made at politicians’ behest. That isn’t representative of diverse economies with democratic governments ranging from South Korea to Mexico.

As for worries a strengthening dollar could spell trouble for EM economies, Fisher Investments MarketMinder looks to recent history. The US dollar strengthened relative to a basket of major currencies from 2014 to 2016 before weakening in 2017.

Did emerging market economies implode over that timeframe?

“No. Some with commodity-dependent economies (Brazil for example) struggled, but those with growing services sectors (India) expanded. The recent dollar rise against most emerging market currencies outside these troubled two is small by comparison. Don’t extrapolate a handful of laggards into trouble for all,” it concludes.

Italy , debt , crisis , BizWealth

   

ADVERTISEMENT