By Chan Quan Min
As in 1997, could speculation in currency markets be leading those with positions in the market to declare, or even as some claim, engineer a ‘crisis’ to ‘create market movement’ with a view to profit from the trade?
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If, as international hedge fund managers allege, Malaysia is in the throes of a wider emerging market sell-off, then the recent performance of the stock market does not seem to show it.
While the local bourse did not start the year on good footing – the FBM KLCI shed 94 points or 5% of its value in January alone – it has since made up for about half of the lost ground.
The benchmark index hit an all time high of 1,872.52 points (closing) on Dec 30 last year only to sink in January to a two-month low, closing at 1,778.83 points on Feb 4.
But in the past week, the FBM KLCI has rallied to break past the 1,800-point physiological barrier. At yesterday’s close, the index stood at 1,825.64.
Are these signs of a recovery from the supposed emerging market sell-off crisis? If so, then the crisis was extremely short-lived.
The same cannot be said of sorry Argentina, which has run its reserves dry in a futile attempt to prop up the peso, and of Turkey, which has had to put through a painful 4.25 percentage point hike in its overnight lending rate to convince investors to keep their investments in the country.
In the earlier two parts of this series, KiniBiz made reference to the irresponsible expansion of the term ‘fragile five,’ typically assumed to be Argentina, Turkey, India, Indonesia and South Africa, to encompass all emerging markets – Malaysia included – despite vastly disparate economic fundamentals.
Today, KiniBiz turns the focus to the hedge fund managers, who of late have been the most vocal on calls of an impending emerging markets disaster. Curiously, their views are roundly opposed by economists.
Currency speculation during the Asian Financial Crisis 1997/8
According to former Prime Minister Dr Mahathir Mohamad, currency speculators were to blame for the sharp depreciation in Asian currencies during the 1997/8 Asian Financial Crisis.
In a note to Mahathir dated Oct 3, 1997, Nor Mohamed Yakcop, who was at that time an advisor to the former premier having left his post at Bank Negara in 1994, wrote on the fall of the ringgit from RM2.50 to RM2.80 to the dollar: “Greed. The speculators saw an opportunity to make money in Malaysia following the Thailand crisis. The big hedge funds bought US dollars in a big converted way using geared capital and borrowed offshore ringgit. They took their profit at 2.80.”
Ostensibly, on Nor Mohamed Yakcop’s advice, Mahathir would later publicly accuse international currency speculators as the instigators of the region-wide financial crisis. The name that was singled out was George Soros.
Unlike other Asian economies, Malaysia chose not to take the International Monetary Fund (IMF) rescue package. Mahathir instead implemented capital controls to halt the flow of money out of the country.
Evidence was scant to decisively prove the role of currency speculators in directly causing the Asian Financial Crisis, but it would not be a stretch to assume, as Malaysia was a small trading nation, that the ringgit could be exposed to speculators seeking to profit on price movements.
Even today, Malaysia remains a small trading nation, albeit with far larger international reserves and a better regulated banking sector. A recent comparison by The Economist found the entire market capitalisation (adjusted for freely traded shares only) of the Malaysian’ stock market of US$143 billion (RM475 billion) to merely equal that of Nasdaq listed Facebook.
Speculators stoking talk of emerging market crisis
As in 1997, there are hints that the ringgit is again being taken for a ride by currency speculators. One economist at a local bank who spoke to KiniBiz hit out at fund managers who “think they are better than economists” at calling the emerging market crisis.
The economist, who declined to be named because he did not want to sour working relationships said, unlike salaried researchers, “fund managers need to make money” and one of the ways could be to “create market movement.”
Hedge funds invested in currency markets have a “very short-term” view, said Gerald Ambrose, managing director at Aberdeen Asset Management. “They have to follow the tide and watch the inflection point” as such funds are “so highly geared.”
Comments such as these certainly draw suspect to the rabid calls of a deepening emerging market sell-off from the comfort of trading desks of hedge funds in the financial capitals of the world, the most recent being from Mark Mobius, an emerging market fund manager at Franklin Templeton Investments.
Media outlets closer to home, capitalising on shock and fear, have been quick to pick up on the market-sensitive talk in articles that have been fashioned out of proportion to the gravity of the situation.
Cooler heads have prevailed at more established newspapers. The Economist, in what appeared to be an editorial, wrote: “Don’t panic. There is no reason for a broad emerging market crisis. But nervous investors could yet cause one.”
The UK newspaper then went on to compare the ‘optimists’ to the ‘pessimists’ on the issue, pitting the IMF on the side of the optimists against the “pessimists, many of them on hedge fund trading desks.”
The December, January kneejerk sell-off explained
Economists agree that there was a minor sell-off in emerging markets in December and January, but nothing as quite as serious as a full-scale crisis.
Royal Bank of Scotland (RBS) managing director and head of economic research for Asia ex-Japan Sanjay Mathur said this week the recent spate of capital outflows should be attributed more to indifferent selling and is unlikely to be a recurring incident.
On the emerging market sell-off, Ambrose said foreign investors would logically “get out of the most liquid market.” Hence, most of the selling in December and January was in Malaysian government securities (MGS) in a dismantling of the carry trade, he explained. As the bonds were sold, ringgit was converted to US dollars resulting in the recent depreciation in the ringgit.
The reversal of capital flows was reportedly due to the prospect of a recovery in the US eventually leading to higher interest rates comparable to that of bonds offered in emerging market economies.
Alliance Bank head of economic research, Manokaran Mottain explained the recent sell-off as nothing more than “short-term panic” causing “disturbance on the exchange rate.” He joined other regional economists in calling the kneejerk sell off last month as “overdone.”
Mottain reckoned the ringgit will go no lower than RM3.40 before stabilising at RM3.30 at year-end.
Foreign exchange traders told KiniBiz trading patterns indicate Bank Negara may have taken to buying the ringgit to keep the exchange rate under RM3.35 to the dollar in recent weeks.
In an email reply yesterday, Bank Negara declined to answer a set of questions from KiniBiz beyond that of its publically available monetary policy statements.
Today, calm has reportedly returned as ringgit volatility measured by Bloomberg fell to 11-month low. This, along with the recovery in the stock market and encouraging gross domestic product (GDP) data can be taken as an indication that the purported crisis is not on the way, at least not in immediate future.
Tomorrow: Why the crisis isn’t one.
Yesterday: Is the 1997/98 spectre on hand?
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