Panellists discuss how to make money from global macro trends
The dollar has weakened since October 3, bucking three months of appreciation, but many expect it to resume its rise. The potential implications for investors in Asia divided independent researchers' opinion at a recent forum organised by industry body Asia IRP in partnership with AsianInvestor.
As measured by the dollar index spot exchange rate calculated from Reuters data, the greenback declined 1.75% to 85.19 yesterday from 86.69 on October 3, having climbed from 79.81 on July 1.
A strengthening dollar usually results in funds flowing out of emerging Asian markets. That's because a weak dollar is usually indicative of loose US Federal Reserve policy, which boosts the global money supply, thus reducing the cost of carry trades and flows to higher-yielding bonds, currencies and equities, as well as boosting commodity prices, which helps EM exporters.
Some of the flows into EM over the past several years, have in part been funded by the US’s extraordinary stimulus measures and low domestic yields.
But there isn’t a simple negative correlation between a strong dollar and equity market performance in the region, said Peter Perkins, Montreal-based global strategist at The Macro Research Board. “If we see a global trade cycle recovery happening alongside [a stronger] US dollar, Asia’s going to be a principal beneficiary of that."
However, John Schofield, director at Tempus Investment, expects investors to have a “tough time for the next three, six months investing in emerging Asia” because of a strengthening dollar.
Perkins contended that one benefit of a strong greenback would be a sorely needed inflationary boost for Europe and Japan. It would make the goods and services produced there cheaper abroad, and boost dollar earnings of companies based in both.
But he saw little chance of the two economies emerging from the mire in the near term. If they did, the dollar would weaken, he added.
“Our view is that the US dollar will strengthen, but it’s not going to take off,” noted Trusted Sources strategist Arnab Das. For this reason, he said he was significantly less concerned about emerging markets than in previous cycles.
Salvatore Ferraro, founder of Evidente, agreed the dollar is still cheap and would appreciate, given the US’s reduced need for funding from the rest of the world.
All of the panellists were bullish about real estate, given excess demand. Zhang was also upbeat on Chinese equities, which he said provided more opportunities for investors than US, Australian or European shares.
Schofield was unconvinced. “This time last year, three big arguments were going on” about the prospects for China, India and Japan, he said. “One year on, and one of those has been resolved,” he added, referring to India.
The outlook for Japan’s economy was the subject of a separate panel discussion at the event.
Freya Beamish, an economist with Lombard Street Research, said she sees “the nasty possibility of yen depreciation and inflation” if structural reform isn’t introduced.
But Takuji Okubo, Japan Macro Advisors’ chief economist, was more sanguine in this regard. “Inflation is great for Japan and yen depreciation is good for exports”, he said.
He downplayed the importance of structural reform. “Insiders knew [Japanese prime minister Shinzo] Abe was not serious about it”, said Okubo.
At the same time, he acknowledged exports had not picked up despite a depreciating yen. The currency has declined by about a third against the dollar since October 2012.
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