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CURRENCY FLOAT
Finally, we have our currency un-peg! What’s going to happen to our
stock market? Are we going to see an exodus of funds due to the
currency gains that the speculators were anticipating? In the contrary,
today (22th July 2005), at the point of writing at 9:10am, KLCI has
gained 15 points (1.6%) to 934, highest peak in 5 years time! Indeed a
great opportunity for short term gain, especially those investors who
play on the technical indicators. However, if you’re looking at a long-
term capital appreciation, please watch out! There are three reasons
why I said that: (1)interest risk, (2) currency risk, (3) inflation risk.
Interest Risk
Alan Greenspan has reiterated the stance of the US Federal Reserve to
increase interest rate from the current 3.25% to 4% by the end of 2005.
As US dollar is depreciating further due to their twin deficits (deficit in
current account and budget deficit), we might see the rate hike to
continue towards next year, 2006. As such, Malaysia and the rest of the
world might follow the US footsteps (to raise interest rates) to prevent
money from moving away from Asia to the US. With raising interest
rates, it will hurt local businesses and thus, the stock market as well.
Currency Risk
From 21st July 2005, our currency will be under a managed float
system. Which means our currency is no longer peg as US$1 = RM3.80,
instead RM is managed with a basket of trade-weighted currencies.
These currencies are mainly Asian currencies. Hence, if US dollar were
to depreciate against these currencies, our RM will move stronger at
RM3.50 (may be?) My concern here is that if within one year our
currency has strengthened against US dollar by as much as 10% (RM3.
42), we might see an exodus of funds from our country as speculators
earlier who parked their money in Malaysia will take profits then.
Inflation Risk
No doubt crude oil prices are breaking historical high, and its going to
head north until the whole world demand for crude oil has come down
quite significantly (like a recession might help), by then due to demand
and supply, and also due to speculations, the crude oil price may
reverse. As for now, crude oil prices are rising, it will be too costly for
our government to subsidise us. According to Sin Chew daily (22nd
July 2005), we might raise the gasoline price by 5% in August 2005 or
about 7 cents. Imagine if crude oil prices were to reach US$80 per
barrel, as predicted by some economists in the US, what will happen to
our gasoline? There will be serious cost push inflation then.
Conclusion
Besides the above macro picture, genuine investors would also study
the company thoroughly, look at the PE ratio, price to NTA, dividend
yields, profit margin and so on. Hence, never rush into the stock
market, stay calm and be patient!
Happy investing,
Pauline Yong
Finally, we have our currency un-peg! What’s going to happen to our
stock market? Are we going to see an exodus of funds due to the
currency gains that the speculators were anticipating? In the contrary,
today (22th July 2005), at the point of writing at 9:10am, KLCI has
gained 15 points (1.6%) to 934, highest peak in 5 years time! Indeed a
great opportunity for short term gain, especially those investors who
play on the technical indicators. However, if you’re looking at a long-
term capital appreciation, please watch out! There are three reasons
why I said that: (1)interest risk, (2) currency risk, (3) inflation risk.
Interest Risk
Alan Greenspan has reiterated the stance of the US Federal Reserve to
increase interest rate from the current 3.25% to 4% by the end of 2005.
As US dollar is depreciating further due to their twin deficits (deficit in
current account and budget deficit), we might see the rate hike to
continue towards next year, 2006. As such, Malaysia and the rest of the
world might follow the US footsteps (to raise interest rates) to prevent
money from moving away from Asia to the US. With raising interest
rates, it will hurt local businesses and thus, the stock market as well.
Currency Risk
From 21st July 2005, our currency will be under a managed float
system. Which means our currency is no longer peg as US$1 = RM3.80,
instead RM is managed with a basket of trade-weighted currencies.
These currencies are mainly Asian currencies. Hence, if US dollar were
to depreciate against these currencies, our RM will move stronger at
RM3.50 (may be?) My concern here is that if within one year our
currency has strengthened against US dollar by as much as 10% (RM3.
42), we might see an exodus of funds from our country as speculators
earlier who parked their money in Malaysia will take profits then.
Inflation Risk
No doubt crude oil prices are breaking historical high, and its going to
head north until the whole world demand for crude oil has come down
quite significantly (like a recession might help), by then due to demand
and supply, and also due to speculations, the crude oil price may
reverse. As for now, crude oil prices are rising, it will be too costly for
our government to subsidise us. According to Sin Chew daily (22nd
July 2005), we might raise the gasoline price by 5% in August 2005 or
about 7 cents. Imagine if crude oil prices were to reach US$80 per
barrel, as predicted by some economists in the US, what will happen to
our gasoline? There will be serious cost push inflation then.
Conclusion
Besides the above macro picture, genuine investors would also study
the company thoroughly, look at the PE ratio, price to NTA, dividend
yields, profit margin and so on. Hence, never rush into the stock
market, stay calm and be patient!
Happy investing,
Pauline Yong
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