Jun 16, 2014

    Foreign interest bright spot amid gloom

    STOCK trading is taking a back seat as World Cup fever hogs the spotlight.

    With punters here staying up into the early morning to watch the matches in Brazil, attention has shifted from taking gambles on the stock market to betting on the favourite football teams.

    This has taken a toll on stock trading: For this month, daily average turnover has fallen to $1.04 billion from May's $1.16 billion, which was itself a drop over April's $1.218 billion, according to Bloomberg data.

    But beneath these lacklustre trading activities shines a bright spot: Foreigners are nibbling at emerging markets again.

    The latest fund flow data from Citi Investment Research shows that there was an inflow of US$2.3 billion (S$2.9 billion) into emerging market funds last week. Asian funds were particular beneficiaries, with foreigners putting a net US$2.1 billion into funds that invest in regional equities.

    "India continued to top the foreigners' best-selling chart with US$1.1 billion of inflow. Taiwan and Korea also saw steady momentum with US$584 million and US$434 million of foreign capital," the report said.

    "Indonesia was the only country seeing a foreign net sell of US$65 million," it added.

    This is a marked contrast from the same period this time last year, when foreigners sucked the very life out of the markets across the region with their relentless sell-off week after week.

    Some readers will recall that in May last year, Ben Bernanke, who was then the US Federal Reserve's chief, sent shock waves through the financial markets by hinting that America's vast money-printing programme that had kept borrowing costs absurdly low might be scaled back.

    Investors stampeded out of regional markets such as India and Indonesia. Their fear was that as the tide of cheap money receded, these countries might struggle to make ends meet since they had relied on foreign capital to help finance their big current-account deficits.

    As this column had observed at the time, the trauma faced by India and Indonesia was similar to woes experienced by Europe in 2012, as the speculative attacks on the bonds issued by heavily indebted countries such as Italy and Spain raised fears that the euro zone would be torn apart.

    Now, both Asian stocks and European bonds are again going in the same direction: upwards.

    Since January, the Sensex Index in Mumbai has risen 19.17 per cent, making India one of the best-performing markets in the world. Investors have been caught up in a frenzy of Modi-mania, betting that the country will be able to break out of a vicious circle of slowing growth, corruption and bureaucracy under its new prime minister, Narendra Modi.

    A similar frenzy is being whipped up in Indonesia, where investors have chased up the Jakarta Composite Index by 15 per cent, hoping that popular Jakarta governor Joko Widodo will win the upcoming presidential election.

    In Europe, investors have regained their appetite for bonds issued by Italy and Spain, and pushed their yields to historic low levels, despite shunning them only two years ago on fears that these countries might be living beyond their means.

    Even in our own backyard, there is the puzzling rejuvenation of the stock trio - Blumont Group, Asiasons Capital and Liongold Group - whose prices had crashed last October. They soared last week on heavy trading volumes, despite the lack of a logical explanation to account for the sudden revival of investors' interest.

    But one obvious driver of the sudden growth in investors' risk appetite - whether for Indian stocks, European bonds or local penny stocks - is the expectation that interest rates will stay very low for now.

    This enables traders to borrow at very low costs and buy assets sporting much higher yields, and pocket a profit.

    There is every reason to believe that such a lucrative trade will continue for now. The European Central Bank is likely to become more accommodative after recently cutting a key interest rate below zero, while the US Fed is likely to keep its benchmark rates at close to zero, after the May jobs report in the United States did not exceed expectations.