Tuesday, 28 January 2014

It's like 1997 all over again?

Since the sell-off of 2013, doom-mongers may argue, two things have got worse.

First it has become even clearer that the rich world’s central bankers do not have much of a clue how to tame the beast they have created in the form of ultra-loose monetary policy. Ben Bernanke, the outgoing Fed chief, chairs his last policy meeting on January 28th and 29th. The Fed is expected to trim its bond purchases by a further $10 billion, to $65 billion a month. No doubt this will be accompanied by a torrent of elegant verbiage to show that the Fed is in command. But sceptics should look at Britain, where the newish central bank boss, Mark Carney, has abandoned the framework he put in place only half a year ago. It was supposed to govern the pace at which monetary policy would return to an even keel. The process of normalising central banks’ balance-sheets is going to be mighty unpredictable and disruptive.

The second change for the worse is that the emerging world’s recovery in exports looks tepid. The hope had been that as the Western world grew faster it would suck in more goods from emerging economies, helping them to improve their current-account balances and making them less dependent on foreign capital inflows.

What might cause the panic to spread from these troubled spots to all the emerging economies? Perhaps if more countries faced either social instability or a sense of political impasse, making tough reforms harder. This is not impossible—India and Indonesia face elections this year which could rouse passions or result in weak governments. Brazil faced widespread unrest last year.

A second trigger might be a sense that the emerging economies are fibbing about the state of their financial systems. The 1997 crisis spiralled when it emerged that many private banks were in dreadful shape and that some monetary authorities had become captives of the private sector. The central banks of Thailand and South Korea misled the outside world, respectively, about their reserves position and their country’s dollar liabilities.

One common characteristic of all emerging countries today is that they have all shared in the colossal credit boom. Loans have been growing by double-digit rates for many years. Vietnam has already blown up—it has set up a “bad bank” to try and clean up its lenders. Perhaps more countries are yet to own up to big, bad debt problems of their own. If you want to give yourself a fright on this front consider the share price of Standard Chartered, a Western bank largely exposed to the emerging world. It has collapsed.

So there are two things to watch for signs that the present panic might morph into something much nastier. First the streets—for more social unrest and political gridlock. And then the banks—for any sign that their books are rotten.

Above snippets from an article in The Economist "It's like 1997 all over again".

I prefer to put a question mark behind that sentence, I do expect things to be tough, but not as bad as in 1997. However, that "optimism" is based on the believe that banks (for instance in Malaysia) are in much better shape than in 1997 and that Bank Negara does indeed have its house in order. I am pretty sure that is indeed the case, but if the perception of foreign investors is worse, than a quick outflow of "hot" money might indeed cause a financial disturbance.

Things have been lately too good for investors, people started to brag last year about the local share market performance reaching an all-time high, both 5-year and 10-year results must have been good, since they were based on low valuations due to respectively the global crisis (2008) and SARS (2003). The local property market also boomed.

When I read about the many multi-billion ringgit IPO's (non if which excites me in the least) and huge rights issues/private placements (what is wrong with good old-fashioned organic growth?) planned for 2014, then that does scare me, it all sounds too much.

Is it a case of too much "loose" cash slushing around in search for some investment and a decent yield?

It sounds very toppish, investors should adopt a defensive stance.

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