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Political Motivations Behind Rate Hikes And A Rebalancing Of The Global Economy
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By: Dr Chan Yan Chong
Articles (200) Profile

The Greek election results are out, and as widely expected, the opposition coalition of radical left-wing parties came to power. Their election manifesto was the end to austerity measures, renegotiations with creditors to restructure its debts, and the willingness to leave the Eurozone. The market has long expected the Greek election to pan out this way, so the latest political situation came as no surprise and did not have much impact on the stock markets.

Wall Street fell the same day the US Federal Reserve released its latest meeting minutes. How different are the conclusions this time compared to the last? No difference actually. Just like the last meeting, this latest meeting also stated that Fed will handle the rate hike issue with patience. It has been 19 months since the Fed raised the possibility of a rate hike, and yet there is still no sign of it. Most might have already written off the likelihood of the Fed raising interest rates this year.

In his State of the Union address this year, US President Barack Obama said that he will tax the rich to help the middle class. He had said something similar six years ago, but has so far failed to deliver on his promise. Currently, the Republicans who are dismissive of this idea have absolute control over the House and Senate in the US Congress, so Obama’s tax plan has no chance to be passed. With two years left to his term and zero possibility of a re-election, Obama still has the responsibility to help the Democrats win the 2016 election.

How likely is it for Obama to raise interest rates this year? If the rate hike leads to another round of turmoil in the global financial markets, will the Democrats stand any chance of winning in the 2016 presidential election? On the surface, the Fed is supposed to operate independently, but one should know that its board members are appointed by the President.

In May 2012, Ben Bernanke suddenly announced that Fed will cease quantitative easing (QE) and raise interest rates, which gave Obama a bad scare. Bernanke was then replaced by Janet Yellen. Yellen certainly knows what she should do, and so she has been talking about a rate hike since taking office, which helped to push up the value of the US dollar on the back of market expectations of the effects of a rate hike. Since 2016 is a presidential election year, Yellen will surely tread very carefully. She has two main tasks in front of her. The first is to maintain a strong US dollar, which she will achieve by keeping up the talk of a rate hike or even actually raising it. Secondly, she has to ensure that the US economy grows at a faster rate.

The US stock market has been quite volatile of late. China’s stock market is also in the midst of a correction, with the 3,400 points on the Shanghai Composite Index forming a major level of resistance. Fortunately, Singapore’s Straits Times Index and Hong Kong’s Hang Seng Index (HSI) have performed well. Even though the Chinese counters among the HSI constituent stocks have fared poorly, the local blue chips picked up the slack to push the index higher.

This year marks Singapore’s 50th anniversary of its independence. It is truly remarkable for a small country like Singapore to arrive at where it is in 50 years’ time. With a booming economy and a population smaller than Hong Kong, Singapore’s gross domestic product (GDP) is higher than Hong Kong’s, which sees it as a long-standing competitor.

Many Singaporeans like to compare Singapore to Switzerland. Switzerland is only slightly more populous than Singapore at 8 million. Not long ago, the sudden appreciation of the Swiss franc shocked financial markets all over the world, and that reflected the status and importance of the Swiss currency in the international financial markets. This is a feat that the Singapore dollar cannot replicate.

Globally, Singapore is still considered a lightweight, so its stock market is always subjected to external influences. Thus, to become a successful stock market investor in Singapore, one must keep an eye out for the world at large.

The best news to come out of the Singapore stock market in recent times is that of Keppel Corporation’s intention to privatise Keppel Land. The buy-back price of $4.60, is 26 percent higher than the last traded price of $3.65 prior to the announcement, though still 7 percent lower than its net asset value of $4.95 per share. There are two reasons why Keppel Corporation is willing to extend such an offer to privatise Keppel Land. Foremost, it hopes that the minority shareholders are willing to accept the price of $4.60 and allow the privatisation exercise to go through smoothly. Additionally, the real net asset value of Keppel Land may be much higher than its stated book value of $4.95 per share. Keppel Corporation’s decision to privatise Keppel Land following two years of falling property prices in Singapore and suggests that there are other property stocks locally that are currently also underpriced.

In recent months, many currencies have been depreciating, with the exception of the US dollar. This has prompted some media outlets to start discussing the notion of a new financial crisis. The Chinese yuan, which many believed can only appreciate, has also depreciated, by as much as 2 percent in a day. Is it true that a financial crisis is brewing or has it already happened? People are talking much about the black swan theory. It is as if the “black swans” are everywhere now, so much so that the 7.7 percent single-day fall of the Shanghai Composite Index on 19 January was also coined a black swan event.

In reality, it is not so much of the world’s currency devaluing, but rather, the US dollar appreciating. The US dollar has picked up, on the back of the end of the nation’s QE coupled with the Fed’s talk about rate hikes. The biggest difference between the situation today and the 1997 to 1998 Asian financial crisis is that the past crisis was the result of an assault from US hedge funds, while the devaluation today is the result of a natural balancing act and the decision of some governments to depreciate their currencies in order to boost competitiveness.

Take Japan, for example. Abe’s policy is for a weaker yen, for he thinks that will help to improve the competitiveness of Japan’s exports, and also attract more visitors to Japan. This past Christmas and New Year holidays, a massive wave of Chinese tourists flocked to Japan. The chairmen of Japanese companies have said in public that should the yen devalue further, they will move their overseas factories back to Japan, and this will help revitalise the Japanese economy.

The Russian ruble depreciated because of the fall in oil prices as oil is Russia’s main export commodity. With less income from its exports, it is natural for the Russian currency to depreciate. Similarly, the devaluation of the euro can be attributed to the QE measures in play within Europe. Faced with falling a yen and euro, Asian countries are suddenly finding themselves much less competitive in comparison, and thus are attempting to weaken their currencies. A similar argument is also applicable to the surprise policy tweak by the Monetary Authority of Singapore.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

Keppel Corp  5.940 +0.02 +0.34%   
Business: [FY18 Turnover] Infrastructure (44.1%), offshore & marine (O&M) (31.4%), property (22.5%), investments (2%).

Insight: Apr-19, 1Q19 revenue rose 4.1% underpinned by high... Read More


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