Fall in rupiah fails to dent regional markets
Asian countries are lot more sound than they were in 1997
PETALING JAYA: Dominating financial headlines last week have been one of these three: Indonesia’s currency crisis, emerging markets headed into a bear market or the US-China trade war intensifying.
Indonesia’s plunging rupiah particularly caused a panic with many thinking perhaps this could spark off a stock market sell-off. After all the stock markets have been having a bullish run since 2009 along with the US stock market.
But the panic button was not pushed due to several reasons.
Many reports have declared how the rupiah is near a level close to what it was during the 1997 Asian Financial crisis, when it hit 16,800 against the US dollar.
As of press time, the rupiah was at 14,871 against the US dollar. The Indonesian central bank has raised interest rates four times since May to counter a deepening rout in the currency.
During the Asian Financial Crisis, the rupiah’s depreciation was a lot wider – rupiah from 2,000 to the US dollar went down to 16,800 in a space of less than a year. This is an absolute loss of some 840%. It caused a shock to the system.
Now in comparison today, while the rupiah is close to those levels at the 14,871 mark, the absolute level of decline is a lot less. On a year to date basis, the rupiah is only down 9%.
So while it is at one of its lowest levels in 20 years, it also started off from a much lower level.
Our ringgit today for instance is at the RM4.14 level to the Dollar, It is weaker than the RM3.80 level during the AFC. However, our economy is a lot stronger today.
Hence while the currencies in the region weakened against the US dollar, it was a gradual depreciation and not a shock to the system, unlike the situation in 1998.
This explains why the emerging market crisis has not snowballed and became a contagion. Sentiments are weak on emerging markets but the impact is confined to a few countries so far.
The other pertinent point is that the rupiah’s weakening is in line with other currencies in emerging markets. This is largely due to the US Federal Reserve’s decision to start hiking interest rates causing a stronger US dollar.
When interest rates rise in the United States, it causes a flow of funds back to that country as investors typically reduce their exposure in emerging markets.
The most vulnerable to an outflow of funds among emerging market economies are countries running a twin deficit – meaning both fiscal and current account deficits. The countries are Indonesia, Turkey and Argentina, which explains why the currencies of these countries have depreciated.
The MSCI Emerging Markets Index is down 12.34% on a year to date basis.
Emerging markets aside, the Dow Jones is up 5.16% this year.
The S&P 500 is up 7.65% while the Nasdaq 100 is up 14.77% this year.
In Malaysia, the FBM KLCI has been pretty defensive and is marginally up 0.02% despite disclosure of RM1 trillion debt.
In his blog “A Wealth of Common Sense” Ben Carlson makes some good observations about the market in general.
Key to note is that while emerging markets are in their bearish or correction phase, economically and fundamentally, most of them, particularly the Asian countries are a lot more sound today than they were in 1997.
Carlson noted that the S&P or the Nasdaq haven’t had a down year since 2008.
During that time, there has been so many scary headlines, yet here these indexes are at all-time highs.
This year alone, stocks in the US have shrugged off trade wars, political instability, emerging market crises, interest rate hikes by the Fed among many others.
So why doesn’t the stock market care about all this news?
“Markets don’t care who the president is. People may not like to hear this but it’s true. Investors care about earnings, interest rates, trends, and sentiment. The stock market and the economy are bigger than any one person or one administration,” wrote Carlson in his blog.
US President Donald Trump said that if he got impeached the market would crash.
The market could always crash but Carlson is guessing it won’t be caused by the presi- dent.
“Stocks were up almost 30% in 1998 during the impeachment proceedings for Bill Clinton. They rose another 21% in 1999. Stocks fell 23% after Richard Nixon resigned from office in 1973.
“The difference is stocks were already going up in the 90s and already going down in the 70s so in both cases they simply continued doing what they were already doing.
Ideology has no place in the markets,” he said.
He added that expectations matter more than the news itself.
“The headlines never matter as much as the reaction to the headlines. Markets move based on relatives, not absolutes. The stock market is forward looking so what’s already priced in matters more than what CNN or Fox News is telling you about what just happened,” he stated.
By the time investors figure out how the current news cycle will impact stocks, the market has already moved on by over or under-reacting to that news. It’s messy but that’s how things work.
He added that things are far from perfect but the markets don’t care about good or bad.
“They care about better or worse. And things continue to get better as a whole with the economy. Eventually excesses will build and we’ll have a sustained downturn. But you won’t hear about it ahead of time in the news,” he concluded.
Likewise, when everyone is proclaiming that emerging markets are headed for the hills, then this likely means that the news is already priced in, and markets are now looking ahead of that.