Southeast Asia's Growing Exchanges

Southeast Asia’s financial markets have been booming. Many of the region’s exchanges have hit multiyear highs recently with several benchmarks hitting double digit year over year returns. Indonesia was even given investment grade status which is opening up the country to a lot of capital inflows. The Philippines are reported to be the latest country to possible get an investment grade status upgrade in the next year. As the region continues to grow and become a safer place to invest among funds and investors, more countries will be trying to improve their financial markets.

Cambodia is the latest country to open an exchange. They had their first IPO that began trading at 9:09AM as it seems that 9 is a lucky number there. As Cambodia grows, they hope their exchange grows as well as the other countries in the region. Southeast Asia has easily been outperforming China in the past year. The main reasoning behind this is the fact that many of these countries grow domestically. They aren’t as export oriented as China. This gives them true growth and not one so reliant on the rest of the world.

Bondholders Beware

The bond market has had a 30 year bull market run. These bull runs are hard to find and seldom last. One that has lasted this long might never be seen again. It looks like things will turn around in the next couple of years. I have been saying that bonds will be the first thing to take a hit when the economy recovers. As the economy has been gaining steam, yields have been inching up. As we all know, when yields rise, bond prices fall. The Fed has given a time frame for rates to remain artificially low. The question is whether these rates can actually be sustained for the next two years.

Yields could soar if the Fed prematurely came out and raised rates. Bondholders would be crushed as the bottom would fall out among prices. I don’t foresee a quick change in monetary policy as the Fed is consistently quoting 2014 as the earliest year to possibly raise rates. Should the economy or inflation force the Fed to show its hand early, bondholders beware. Even still, Treasuries remain one of the safest places to hide as the economy struggles to provide consistently good news.

Return of the Carry Trade

The 90’s are roaring back in fashion as carry trade opportunities reignite. The carry trade is a way to profit off currencies and rates. Investors borrow money in one country where rates are low and exchange it for currency in a country where rates are high. The carry trade went away and was rarely used when the global economy went into a recession. The easy monetary policies around the world cut down on carry trades. The artificially low rates kept the dollar and euro as currency of choice to borrow from.

Japan is trying to keep the yen artificially low. The yen was the currency of choice back in the 1990s. Investors are borrowing yen and then investing in Mexican pesos, the Brazilian real, or other countries where the interest rates are higher than the rest of the world. This only works as long as Japan keeps flooding the market with yen to keep rates low and the currency from strengthening. As long as the yen keeps falling, investors will profit from the spread in rates and the currency play.