The State of the Economy, Post 2Q2016

Investments, be it bond, equity, multi-assets in foreign countries are exposed to special risks, including currency fluctuations, economic instability and political developments. In certain economies, however, the heightened risks are due to limited number of players in the market, lesser liquidity and lack of business or economic frameworks to support the market. Acknowledging that the investments are susceptible to these risks and uncertainties, therefore it is important to be aware of the happenings in the world.

Brexit

No one has thought that Brexit would actually happened came morning of 23^rd June, but happened it did. Now it’s the time for Britons to wake up and face the consequences.

Post Brexit we could see switching activities happening in the fixed income market, where investors sold their Euro/UK sovereign holdings and went down the credit curve hunting for EM bonds. This activity has indicated investors reaction towards uncertainties in the market and their search for higher yield but relatively safe investments. EM economies have fared better than 2015 due to slight rebound in commodities’ prices, currencies strengthening, and better economics numbers. Post Brexit we could also see that EM had experienced minimal volatility, signalling that the EM economies are sheltered from the downside risks imminent in the Eurozone and have thus far performing more in line with their economic fundamentals.

This is important, especially after disappointing returns since 2013, the investors are pondering the possibilities that the market is set for better EM returns over the next few years.

UK, with its stagnant economics, currently runs the highest current account deficits in the developed world. Now that there’s no turning back for UK, we could anticipate a breakup in the country via Scottish and Irish referenda. Market believes that there is a higher chance for BoE to further cut rates and ECB to extend its QE this year.

Question is, will there be a EU breakup?

Failed coup d’état

There was an attempt of coup in Turkey on 15^th July and it has been thwarted and the Turkish government has had full control of the situation on Saturday. That said coup was not the first to Turkey as there have been multiple coup attempts in the past 60 years

As for sovereign risk, the event has sparked more downside risks to the government bond and credit ratings. The rating agency, Moody’s, will have its Turkish rating review on the 5^th August, in which if they decide on a downgrade, it would then push the sovereign rating to junk, from the current Baa3/Negative. Both S&P and Fitch rated Turkey as BB+/Stable and BBB-/Stable.

Finally, a cut!

On the domestic front, there was an overnight policy rate cut, a first since July 2014. It was during the monetary policy committee meeting held on 13^th July where the new central bank governor has decided to cut benchmark policy rate by 25bps to 3.00%. The cut happened post Brexit, where it was likely that the central bank took advantage from the delay in the Feds interest rate normalization policy.

However, this cut also came as a surprise for many, as economists predicted the cut to materialise in September or later, due to minimal forward guidance to indicate that such a hike was imminent.

Major indicative reasons for the cut; subdued inflation where it gives policy room for loosening, downtrend in consumer and business confidence as well as low and stable inflation in the environment of low global energy and commodity prices. Immediate impact post OPR cut could be seen on sovereign bond where the mid to long tenor had seen the biggest yield drop, resulted in bullish flattening of the yield curve. However the impact was not large per se, as the market has earlier priced in the possibility of rate cut, where yields have fallen by 30-60bps across the curve ytd. Ensuing this, the corporate bond’s behaviour may follow the fall in government bond yields.

Overall, adjustment to the OPR level is intended for the degree of monetary accommodativeness. After all, neighbouring countries in the region are also cutting the interest rates. Interesting thing to note that contrary to textbook theory, MYR has strengthened post cut. The reason could be due to inflows of foreign investments (mainly in the mid tenure of MGS) as the market is anticipating for further cuts in the following months.

 

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Early 2016 Market Update

The time has finally come for certain countries to adopt negative interest rate policy, moving further from zero interest rate policy. Japan has on 29 Jan announced a surprise deposit rate cut to negative, resulting in a benchmark rate of -0.1%. Initially this policy serves as an effort to weaken the yen in order to stimulate an investment shift to other asset classes. The JGB yields have fallen, which was expected as a result from the cut. However instead of weakening the yen, the currency rallied against USD, citing an impact from global slowdown and weak growth in China. BoJ still persistence in further cutting the interest rates as long as it is necessary to achieve an inflation target of 2%.

For central banks in the Eu and Japan, after years of ultra low and even negative rates as of now, its still unclear whether further easing is actually helpful to the economy.

China on the other hand, has eliminated quotas for foreign institutional investors in a bid to encourage local currency bond buying. This is considered as part of major deregulation process by the chinese government. At about USD 6 trillion, China bond market is the third largest in the world, but foreign investors only hold about 2% of the market. Opening of the bond market is also aligned with the PBoC’s effort to encourage Chinese companies to finance themselves in the local corporate bond market, where in turns to be less relying on China shadow banking system.

Besides that, PBoC has cut its reserve requirement by 50bps as to support growth. Malaysia’s central bank has also cut the statutory reserve requirement of 50bps to 3.5%, in an effort to stimulate liquidity in the market.

Rating downgrades for several countries, particularly Brazil, Bahrain, Oman, Saudi and Kazakhstan. Major reason cited by the rating agencies, among others, is the concern over the impact of extended low oil prices on the countries’ finances. Other than that, several commodity-related issuances also faced rating downgrades, particularly due to reason of high gearing level and also deteriorating cash flow debt protection level by the issuers.

From this, we predict for a sub trend global growth as our base case, low global GDP and inflation level, further slowdown in China and weak commodity prices. We havent seen the bottom of crude oil price yet. With the Iranian sanction being lifted-off, oil could depreciate further as supply increases.

sluggish times ahead?

The US Fed had its first rate hike in almost a decade in Dec 2015, which appears to be tightening very late into the economic cycle and amidst declining corporate earnings in the US. With strong Dollar and subdued inflation currently permeating the economy, it seems that now is the year of policy divergence, i.e the US is tightening while the rest of the world easing.

In contrast, ECB continues to enhance its QE program and Japan struggles to grow out of deflation. The regions currently are operating in a negative interest rate environment.

Commodity slump affecting emerging market economies, along with capital outflow, tightening liquidity and weak currencies. These factors ascertaining a challenging 2016 for Asian emerging market economies, particularly the countries that have built the economies to serve China commodities demand.

Asia GDP growth will continue to decelerate in 2016 as a result of high debt, excess industrial capacity and poor external demand. In some Asian countries, the debt levels have reached more than 150% of GDP. Japan for instance, its debt level has now reached near 400% of its GDP. Malaysia’s debt is now over 200% of GDP and surprisingly Indonesia is below 100% level.

Interesting updates have emerged beginning of 2016, where Malaysia’s central bank has cut the statutory reserve requirements (SRR) from 4% to 3.50%, as an effort to increase liquidity in the market and also serves as a credit creation measure. The market now anticipates further cuts throughout 2016, with a probable OPR cut towards the end of 2016. As of December 2015 the foreign holdings of the govt bonds including the t-bills was around 46%..

In an effort to pump money into the market, Japan BoJ has also cut its interest rate. In which it turns out to be a good news for emerging market economies, whereby investors could be seen shifting to EM in searching for higher yields. EM countries, particularly Indonesia, India and Mexico are leading in terms of foreign inflows in their government bonds so far in 2016. In Indonesia, the majority of foreign inflows occurred after Bank Indonesia reduced policy rates by 25bp in January 2016.

2016, as everyone predicts, will be another year of sluggish growth for the global economy as well as volatility in the bond market.

Driving forces behind EM currencies

Much has been talked about the Malaysian Ringgit downward movement against the US Dollar. As to date MYR is the worst performing currency against USD in the Emerging Market (EM) space, comprising of countries in the regions of LATAM, Asia (Malaysia included) and MENA,

Therefore to understand such currency behaviour, I’d gather few notes hoping that’ll be able to clear the confusion on this

One reason explaining why EM currencies behaving dismally versus the USD is due to not a single EM central bank has engaged in quantitative easing (QE) practices, as done by other developed central banks, like the US, Europe and Japan. Similarly not a single developed central bank has bought EM assets as part of their QE programmes.Thus, EM assets along with their currencies, have in effect suffered in a state of benign neglect. Apart from that sentiment also mirrors the destination of QE flows, where the EM countries have experienced a slowdown in their share of financial flows – even outflows in some cases.

The strong USD has also pushed down commodity prices, which has benefitted the majority of EM countries, sans Malaysia, being an oil exporting country. However, in a market that rarely distinguishes between EM countries and tends to focus on the negative stories, even the lower commodity prices have reinforced the EM scepticism. USD rally was predicted based on the view that the US economy would grow faster and that the Fed would hike sooner than the other developed countries. Market has been expecting the hike since beginning of the year. However now the USD has became so strong that, at the margin, it is impending growth and influencing Fed policy in a dovish direction. When the Fed failed to hike the rate in September, of which citing the reason of slowdown in external markets, the USD has become the victim of its own success.

The reason as to why we haven’t seen a rally in EM currencies is due to no serious outright downward pressure on USD; where there is absent in US inflation and also due to volatility of EM FX.

Some positive news for EM currencies..

Firstly, EM currencies are cheap after four years of unrelenting depreciation. Secondly, if the USD now flat-lines, the expected annual depreciation of EM currencies will also be less, probably closer to zero per year than -10% per year of the past few years. Having said that, 2016 is still expected to be benign for EM currencies and bond market, where it is only forecasted to rebound in the year 2017 onwards.

 

 

 

3Q2015 Market Updates

So many things happening in the past 4 months or so.

Here’s the snippets

Market has been crazy volatile in the months of August and September. Lots of bond sell downs in the emerging market space, where and especially malaysia that wasnt spared from it. a combination of global risks, weak inflation and tighter financial conditions encourage the monetary policy heading to year end more dovish that before. on top of that, the emerging market assets have weakened largely due to commodities slump, slowdown in China (growth forecast below 7%?), strength in dollar as well as the possibility of US’ Feds policy tightening

Oil price again plummeted to below $50 level. Coupling that with slowdown in China and devaluation of yuan, have brought ringgit down to 17 years of historical low against dollar. It was crazy.

But as they say, whatever goes up must come down. Now we see market has somewhat less shaky, given that the US’ Feds ‘delaying’ interest rate hike and the market has also managed to price in the rate hike up until 1Q next year. Currently the US dollar position has also calmed a bit that brought ringgit level up a bit.

Brent crude oil hovers at below $50 level which serves as an indicative level for revenue generation forecast for the country. Now analysts are expecting the level will go up to $70 starting only in 2017 onwards. Hence, 2016 continues to be a volatile year.

Expectations from the market:-

• Further targeted stimulus by PBoC on China stability
• Abenomics aint working, sorry Mr. Abe. Japan is viewed to be facing a possible relapse into recession. Given that S&P has cut Japan rating to A+ from AA- in September due to economic support for Japan’s sovereign creditworthiness has continued to weaken in the past three to four years. Plus they are also in view that the govt’s economic revival strategy is not able to reverse the deterioration in the next few years.
• US’ Fed hike by year end, up by 25bps. If not, then by 1Q2016.

Honestly none of analysts and economists I met is positive for 2016, at least for the first half. I’m not seeing any bright spot either.

the YLDP

I have, on random days, asked my friends random questions and polled their answers for my own keep. Like earlier today I asked my colleagues who is their least desirable person in the market, or YLDP. I’m so busy, I know.

Here are some of their answers:-

• loud mouthed guys. we dont mind loud people, really. but there are guys who always always make lame jokes and be really bingit about it.
• annoying high pitched treasury sale people who always appear too bright on a monday morning. give em creeps apparently.
• certain people from a certain (biggest) local investment bank. they’re, well, proud? only god knows why.

 

 

 

 

the thing about our market..

..is that its too small.

 

That everyone kinda knows each other and for some, the dirty stories behind them as well. For instance I know a girl who slept with a guy one day, and the next day everyone in the market gossiped about it. Pity her.

Besides that it is really difficult to avoid meeting ‘your least desirable person’ or ‘YLDP’ in the market. There are always sessions like conferences, seminars, market updates where there is a tendency to bump into YLDP.

I heard countries like India and Indonesia are the analysts’ favourite this year. So how fast can I move there?

Bleak Market

I am so worried. In fact we are all jumpy in the trading room. Ringgit has fallen so badly in the last few weeks, making it the worst performing currencies in the region. Stock index has also shifted down so quickly (reasons unknown to us. could it possibly just because of oil price?)

More importantly bond market is expected to follow the downward pattern soon. In emerging market we can already see the impact of stronger dollars as opposed to the weakening emerging market currencies. Russia ruble has dropped so badly, its worst condition in 16 years. We have exposures to bonds in Russia and therefore this has hit us in terms of market value quite badly.

Why is this happening at the last stretch of 2014, nobody knows.. This worrying market condition is also the reason why I’m typing this at the office at 9pm tonight. Got to finish up some papers on this tonight. Sigh…

The new job

So..

I got this new job and currently I’ve been here for almost a month. Gotta say I hardly feel it cause I’ve been busy with meetings, daily reportings and whatnots. Literally there have been daily meetings (up to 2-3 times a day) and conference calls with the portfolio managers. Draining, but all is well though. Still coping and learning the ropes around here.

I used to be on sell-side (the dark side of the investment banks, they say) but now I’m on the buy-side, specifically focusing on fixed income investments (bond and sukuk).

Apart from the awesome perks and benefits, there are some other things that I like about this new job. Am writing it here as part of my gratitude project (one thing that I promise to myself to constantly do).

– Opportunities to travel / attachment programs with the fund managers abroad

– Super nice bosses & colleagues. One has to experience dealing with harrowing bosses to appreciate these new superiors.

– New like minded friends. I think I made friends quite easily here, thank God for that.

– Messy but awesome trading desk with Bloomberg terminals just few steps away.

– Plenty of new things and areas to learn. Areas such as Emerging Market debt and Asian debt to look at with the differing geo-political situations, country ratings, potential rates and currencies strategies, etc.

– New phone 🙂

– Trading room is quite after market hours, thus I’m able to study after work

– There are 3 people in the trading room who are currently undertaking CFA. So yeah, glad to have these people to study with.

All in all, I am grateful to land this job. Of course there are few hiccups here and there (to mention a few; the slow bureaucratic process, yikes! and the attendance monitoring system – I have to be present at the office latest at 8.29am, imagine the traffic horror I have to face every morning), I am beyond grateful, nonetheless.

The Ring Around the Sun

Assalamualaikum..

Been busy with life that I couldn’t be arsed to write anything for the past couple of months. And suddenly its nearing the end of July. How did the past 6 months just disappear?

 

Sold my car and got a supposedly fuel efficient and environmentally friendly new machine.

Went to Jakarta in February

Went to Japan (again) with the colleagues in early May

 

Enrolled for CFA programme. One of the toughest exams in the world, the hell was I’m thinking? Library visits, weekend classes and tests are part of life (foresee that I wont be enjoying much life for the next 3 years). Enjoying the company of my brilliant classmates though, bless them.

 

On a job hunt. thus been to interviews. Got an offer. Resigned from current job. But still going for interviews in other companies. Still have 2 months to serve the notice period.

 

Bought a studio apartment. Actually this was done on impulse. The construction of the condo is supposedly finish this coming year end. We shall see.

 

Til then.