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CURRENCY & FOREX  NEWS

2010 Strong Sing $ won't wipe out returns on offshore investments 16 oct 2010
2009  

Blackstone CEO: Worst over, Future Is Brighter  

Dollar May Fall to 50 Yen, Lose Reserve Status, Sumitomo Says

The Message of Dollar Disdain
With U.S. debt set to exceed 100% of GDP

 

 

Putting one's money in emerging regional countries has paid off well for a Singapore investor in the last 11 years

By TEH HOOI LING 16 OCT 2010
SENIOR CORRESPONDENT

Of the 12 countries I looked at, only the currency of one managed to gain against the Singapore dollar, and that country is Australia. The Aussie dollar strengthened by about 18 per cent against Sing dollar in the past decade. All the other countries' currencies weakened. The Indonesian rupiah has lost the most against Sing dollar.

THE headline news for this paper yesterday was 'MAS springs another Sing dollar surprise'.

'The Monetary Authority of Singapore (MAS) surprised markets yesterday by signalling that it will allow faster gains in the Singapore dollar to fight inflation, sending the currency to an all-time high against the US dollar,' it was reported.

Fluctuations in foreign exchange have always been a factor to consider in any offshore investments, and perhaps particularly so now given the increasing talk of a currency war erupting.

I was reminded of a comment made by a chief financial officer of a Singapore group with numerous investments overseas. 'It's tough for Singapore companies to invest overseas because of the appreciating Singapore dollar. Most of the gains one makes will be gone once converted back to Singapore dollars.'

Of course, this friend exaggerates. Yes, the Singapore dollar has been on this inexorable march upwards against most currencies in the region. But the appreciation has not been so great as to wipe out all the investment returns.

Of the 12 countries I looked at, the currency of only one country managed to gain against the Singapore dollar, and that country is Australia. The Aussie dollar strengthened by about 18 per cent against the Sing dollar in the past decade.

All the other countries' currencies weakened vis-a-vis the Sing dollar. The Indonesian rupiah has lost the most against the Sing dollar. Between the beginning of 2000 and now, the rupiah has declined by about 38 per cent against the city-state's currency. The US dollar, British pound, Hong Kong dollar, Korean won, India's rupee, the Philippines' peso and the New Taiwan dollar fell by between 20 and 28 per cent.

The Indonesian market

The Thai baht, Chinese yuan and Malaysian ringgit held up pretty well against the Sing dollar. Each declined between 2.4 per cent and 3.6 per cent.

So obviously, for those who have invested in the Indonesian market, the investment return has to be more than 38 per cent between 2000 and now for an investor to be making a positive return in Singapore dollar terms. The hurdle rates for the other markets are lower.

So have investments into these offshore bourses paid off for investors?

In most cases, yes, and some pretty big time at that. For example, the Jakarta Composite Index advanced by 415 per cent between Jan 7, 2000 and Oct 8, 2010. In those years, the companies also distributed dividends. Assuming the dividends were reinvested back into the index, the return in those 11 years or so is a whopping 710 per cent. That's a 20-odd per cent compounded return a year.

But as mentioned earlier, the rupiah declined by about 38 per cent against the Singapore dollar during that period. Converting the return back to Singapore dollar, what's an investor's net return? Well, it's 414.5 per cent. That's still a very good return of 16 per cent compounded every year over the last 11 years or so.

The second best-performing bourse is Bombay's Sensex which returned 250 per cent between 2000 and 2010 in Sing dollar terms. The Stock Exchange of Thailand is not too far behind with a return of 213 per cent.

Worst-performing indices

As for investors in the Australian market, they'd be in the happy situation of having seen their investment return boosted further by the appreciation of the Aussie dollar against the Sing dollar. That bolstered total return by more than 40 percentage points in the last decade.

Meanwhile, the S&P 500 in the United States and London's FTSE 100 are the two worst-performing indices we looked at. They were down by 19.2 per cent and 13 per cent respectively. But their depreciating currencies compounded the loss to a Singapore-based investor. Fortunately for investors in the FTSE 100, the stocks there distributed quite a bit of dividends over the years. And that made up for almost all the losses - both in price and currency depreciation.

The S&P 500 wasn't as generous in its dividend distributions, according to data from Bloomberg. Consequently, a Singapore-based investor would be down by about 22.7 per cent in all.

The Taiwan Stock Exchange is the second worse-performing market of the 12 overseas markets we looked at. The decline in its currency is the major culprit for its poor performance to a Singapore investor. However, dividends made up for a large part of those losses, and a Singapore investor would be down by a marginal 1.6 per cent.

But the real loss of course is the opportunity cost. Had the investor just put his or her money in the Singapore market, they would have reaped a return of 37 per cent in capital appreciation. For some reason, Bloomberg didn't have the dividend figures for the Straits Times Index. Including dividend, I reckoned the total return in the Singapore market would amount to some 70 per cent. That's none too spectacular, at just about 5 per cent a year.

But as can be seen from the table, dividends - reinvested into the market - actually form a big part of the total return for most of the markets we look at. So don't sniff at the dividends you get.

The market that saw the smallest contribution from dividends is the Shanghai Composite Index.

All in all, putting one's money in emerging regional countries has paid off well for a Singapore investor in the last 11 years. Perhaps one reason could be that because of their weak currencies, companies in those markets are competitive globally and hence that shows up in their bottom line.

Extra bonus

The good news now is that according to data compiled by StarMine, despite the very strong run-up in the prices of many regional bourses, valuations still don't look stretched. Markets such as Korea, Vietnam, Australia, Taiwan and Thailand are still trading at less than 13 times analysts' forecast earnings for the next 12 months.

Singapore, on the other hand, is trading at 13.9 times forward earnings. So from that perspective, there appears to still be value in investing in regional bourses. And going forward in the next 10 years, it may even be possible for us to see some of these regional currencies appreciating vis-a-vis the Sing dollar as their economies develop. That will be the additional bonus all investors investing overseas are looking forward to.

  • The writer is a CFA charterholder
  • Blackstone CEO: Worst over, Future Is Brighter

     Reuters | 14 Oct 2009 | 04:05 AM ET
     
    Private equity firm Blackstone Group's chief executive said the worst of the industry's slump is behind it, and dealflow and IPO investments are opening up again."We've all been through a trying period," Stephen Schwarzman said on Wednesday in a speech at the Super Return Middle East private equity conference in Dubai.The future looks brighter and he is seeing "more than green shoots" of recovery, though the scale of economic growth through next year is still unclear."We do not expect the U.S. economy to slip back into recession, but we do believe that weak consumer spending and continued constraints on bank lending will dampen the U.S. economic recovery in 2010 and 2011,"Schwarzman said.He is evaluating the prospects for up to seven IPOs, in addition to one already filed, which he said were spread across a variety of sectors and geographies.There are also signs of life in the bank financing market, he said."We can certainly do transactions in the $3 billion to $4 billion range at this stage in the cycle," he said on the sidelines of the conference.
     "And with low leverage involved, deals of that size can use in excess of $1 billion equity." Schwarzman sees the opportunity for more deals ahead but noted Blackstone had been outbid by strategics ? meaning companies rather than private equity firms ? on several occasions.He said Blackstone is open to investing in the Middle East and sees the firm opening an office somewhere in the region. He declined to specify which city.Schwarzman earlier made some of the details of his speech available to investors in Blackstone's funds.

    Dollar May Fall to 50 Yen, Lose Reserve Status, Sumitomo Says

    2009-10-15 03:58:19.438 GMT

    By Shigeki Nozawa

    Oct. 15 (Bloomberg) -- The dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency,Sumitomo Mitsui Banking Corp.'s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.

    "The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,"said Daisuke Uno at Sumitomo Mitsui, a unit of Japan's third- biggest bank. "The dollar's fall won't stop until there's a change to the global currency system."    The dollar last week dropped to the lowest in almost a year against the yen as record U.S. government borrowings and interest rates near zero sapped demand for the U.S. currency.

    The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has fallen 15 percent from its peak this year to 75.276 today, the lowest since August 2008.    The gauge is about five points away from its record low in March 2008, and the dollar is 2.5 percent away from a 14-year low against the yen.    "We can no longer stop the big wave of dollar weakness," Uno said. If the U.S. currency breaks through record levels, "there will be no downside limit, and even coordinated intervention won't work," he said. China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency. Hossein Ghazavi, Iran's deputy central bank chief, said on Sept. 13 the euro has overtaken the dollar as the main currency of Iran's foreign reserves.

    Elliott Wave

     The greenback is heading for the trough of a super-cycle  that started in August 1971, Uno said, referring to the Elliot Wave theory, which holds that market swings follow a predictable five-stage pattern of three steps forward, two steps back. The dollar is now at wave five of the 40-year cycle, Uno said. It dropped to 92 yen during wave one that ended in March 1973. The dollar will target 50 yen during the current wave, based on multiplying 92 with 0.764, a number in the Fibonacci sequence, and subtracting from the 123.17 yen level seen in the second quarter of 2007, according to Uno. The Elliot Wave was developed by accountant Ralph Nelson Elliott during the Great Depression. Wave sizes are often related by a series of numbers known as the Fibonacci sequence, pioneered by 13th century mathematician Leonardo Pisano, who discerned them from proportions found in nature.    Uno said after the dollar loses its reserve currency status, the U.S., Europe and Asia will form separate economic blocs. The International Monetary Fund's special drawing rights may be used as a temporary measure, and global currency trading will shrink in the long run, he said.

    The Message of Dollar Disdain
    With U.S. debt set to exceed 100% of GDP


    By JUDY SHELTON
    Unprecedented spending, unending fiscal deficits, unconscionable accumulations of government debt: These are the trends that are shaping America's financial future. And since loose monetary policy and a weak U.S. dollar are part of the mix, apparently, it's no wonder people around the world are searching for an alternative form of money in which to calculate and preserve their own wealth.

    It may be too soon to dismiss the dollar as an utterly debauched currency. It still is the most used for international transactions and constitutes over 60% of other countries' official foreign-exchange reserves. But the reputation of our nation's money is being severely compromised.

    Funny how words normally used to address issues of morality come to the fore when judging the qualities of the dollar. Perhaps it's because the U.S. has long represented the virtues of democratic capitalism. To be "sound as a dollar" is to be deemed trustworthy, dependable, and in good working condition.

    It used to mean all that, anyway. But as the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade. Who wants to accumulate assets denominated in a shrinking unit of account? Excess government spending leads to inflation, and inflation plays dollar savers for patsies—both at home and abroad.

    A return to sound financial principles in Washington, D.C., would signal that America still believes it can restore the integrity of the dollar and provide leadership for the global economy. But for all the talk from the Obama administration about the need to exert fiscal discipline—the president's 10-year federal budget is subtitled "A New Era of Responsibility: Renewing America's Promise"—the projected budget numbers anticipate a permanent pattern of deficit spending and vastly higher levels of outstanding federal debt.

    Even with the optimistic economic assumptions implicit in the Obama administration's budget, it's a mathematical impossibility to reduce debt if you continue to spend more than you take in. Mr. Obama promises to lower the deficit from its current 9.9% of gross domestic product to an average 4.8% of GDP for the years 2010-2014, and an average 4% of GDP for the years 2015-2019. All of this presupposes no unforeseen expenditures such as a second "stimulus" package or additional costs related to health-care reform. But even if the deficit shrinks as a percentage of GDP, it's still a deficit. It adds to the amount of our nation's outstanding indebtedness, which reflects the cumulative total of annual budget deficits.

    By the end of 2019, according to the administration's budget numbers, our federal debt will reach $23.3 trillion—as compared to $11.9 trillion today. To put it in perspective: U.S. federal debt was equal to 61.4% of GDP in 1999; it grew to 70.2% of GDP in 2008 (under the Bush administration); it will climb to an estimated 90.4% this year and touch the 100% mark in 2011, after which the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019.

    The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio (which measures the debt burden against a nation's capacity to generate sufficient wealth to repay its creditors). In 2008, the U.S. ranked 23rd on the list—crossing the 100% threshold vaults our nation into seventh place.

    If you were a foreign government, would you want to increase your holdings of Treasury securities knowing the U.S. government has no plans to balance its budget during the next decade, let alone achieve a surplus?

    In the European Union, countries wishing to adopt the euro must first limit government debt to 60% of GDP. It's the reference criterion for demonstrating "soundness and sustainability of public finances." Politicians find it all too tempting to print money—something the Europeans have understood since the days of the Weimar Republic—and excessive government borrowing poses a threat to monetary stability.

    Valuable lessons can also be drawn from Japan's unsuccessful experiment with quantitative easing in the aftermath of its ruptured 1980s bubble economy. The Bank of Japan's desperate efforts to fight deflation through a zero-interest rate policy aimed at bailing out zombie companies, along with massive budget deficit spending, only contributed to a lost decade of stagnant growth. Japan's government debt-to-GDP ratio escalated to more than 170% now from 65% in 1990. Over the same period, the yen's use as an international reserve currency—it clings to fourth place behind the dollar, euro and pound sterling—declined from comprising 10.2% of official foreign-exchange reserves to 3.3% today.

    The U.S. has long served as the world's "indispensable nation" and the dollar's primary role in the global economy has likewise seemed to testify to American exceptionalism. But the passivity in Washington toward our dismal fiscal future, and its inevitable toll on U.S. economic influence, suggests that American global leadership is no longer a priority and that America's money cannot be trusted.

    If money is a moral contract between government and its citizens, we are being violated. The rest of the world, meanwhile, simply wants to avoid being duped. That is why China and Russia—large holders of dollars—are angling to invent some new kind of global currency for denominating reserve assets. It's why oil-producing Gulf States are fretting over whether to continue pricing energy exports in depreciated dollars. It's why central banks around the world are dumping dollars in favor of alternative currencies, even as reduced global demand exacerbates the dollar's decline. Until the U.S. sends convincing signals that it believes in a strong dollar—mere rhetorical assertions ring hollow—the world has little reason to hold dollar-denominated securities.

    Sadly, due to our fiscal quagmire, the Federal Reserve may be forced to raise interest rates as a sop to attract foreign capital even if it hurts our domestic economy. Unfortunately, that's the price of having already succumbed to symbiotic fiscal and monetary policy. If we could forge a genuine commitment to private-sector economic growth by reducing taxes, and at the same time significantly cut future spending, it might be possible to turn things around. Under President Reagan in the 1980s, Fed Chairman Paul Volcker slashed inflation and strengthened the dollar by dramatically tightening credit. Though it was a painful process, the economy ultimately boomed.

    Whether the U.S. can once more summon the resolve to address its problems is an open question. But the world's growing dollar disdain conveys a message: Issuing more promissory notes is not the way to renew America's promise.

    Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

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