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Showing posts with label money and finance. Show all posts
Showing posts with label money and finance. Show all posts

Saturday, August 4, 2018

Coming recession in 2020? Possibly earlier

Negative rates: Pedestrians walking past the Bank of Japan (BoJ) headquarters in Tokyo. BoJ’s goal remains at keeping real interest rates as negative as possible, as long as the economy performs. — Bloomberg
IT’S mid-term review time as the US yield curve begins to flatten.

This curve tracks the relationship between interest rates of US government debt obligations. Normally the yield curve is rising, with long-term bonds having yields higher than short-term obligations.

But occasionally the curve inverts, with long bonds yielding less than short Treasury bills – a historical predictor of future recessions and bear markets in stocks. Recently, the curve has become noticeably flatter, with short rates rising and longer yields remaining stagnant. This has led many analysts to think that the yield curve will soon invert.

But that does not mean a recession is imminent. Just returned from an extended visit back to Harvard. Touched base with my mentors and professors at both extremes of the economic spectrum. They are all split on what this flattening really means. In the event it does invert (the gap today being below 0.3%), recession has almost always (over the past 50 years) followed within a year or so. But few see a recession soon on the horizon.

The first half has come and gone. The ongoing transition to more normal conditions continue in the context of a robust US economy; continued progress in the orderly normalisation of US monetary policy; and re-awakened sensitivities to geopolitical and protectionist risks.

There will be higher interest rates, some inflation concerns and trade tariffs coming-on in the context of markets more readily accepting two to three more rate hikes by the Fed in 2018. The prospect of a global trade war makes everyone very cautious.

Once we start down the road of tariff increases and threats of more to come, the dangers of retaliatory miscalculations are real and very scary. Still even an inverted yield curve should not be on top of our worry list under today’s accommodative monetary conditions.

Synchronised pick-up

The world economy benefitted from four drivers of higher growth: the healing process in Europe, re-bound from slowdowns in Brazil, India and Russia; soft landing in China; and pro-growth measures in US.

To persist, Europe needs to do much more. Also, there is hope that recent tariff tensions would eventually lead to fairer and still-free trade which recognises the inter-dependent nature of global supply chains, and show greater willingness to protect intellectual property rights, modernize trade arrangements and reduce non-tariff barriers. Yes, more rate hikes from the Fed are still on the cards. But the same by the European Central Bank (ECB) and Bank of Japan (BOJ) demand trickier manoeuvring.

This is an area that warrants close monitoring since volatility will likely persist. At least for now, fears of Japan-like deflation in US and Europe are effectively gone. But OECD is worried global growth is not yet self-sustaining. It’s strength in 2018 is largely due to monetary and fiscal policy support – and lacking in rising productivity gains and sweeping structural reforms. In Europe, the “clock is ticking”; without reforms, more populist uprisings will appear as the upswing ages and then fades. US inflation is not only returning to the Fed’s 2% target, but also likely to exceed it. In Europe, consumer prices were last still lower than a year ago – below the ECB’s target of just below 2%. Fear of the spectre of deflation has led BOJ to remain cautious about tapering its monetary easing program. Will just have to wait and see.

IMF warns that the world’s US$164 trillion debt pile (at 225% of GDP) is bigger than at the height of the financial crisis a decade ago. One-half was accounted for by US, Japan and China. What’s needed is for US fiscal policy to be recalibrated to bring down the government debt to GDP ratio (80%) and for China to deleverage its US$ 2.6 trillion private debt. There is no sign either is being done which runs the risk of triggering yet another financial crisis.

Growth will falter

Growth in US can slow considerably when the boosts from last year’s tax-cuts in US fades in 2019 and 2020. IMF now warns that US will grow at about one-half the 3% annual pace forecast by the White House over the next 5 years, reflecting the effects of growing massive fiscal deficit and continuing trade imbalance. For US, sluggish productivity remains a key determinant. In 2Q18, GDP picked-up to rise 4.1% (2.2% in 1Q18) the fastest pace in nearly four years, reflecting broad-based momentum.

But worker productivity advanced 1.3% from a year earlier, consistent with the sluggish 1.2% average annual rate in 2007-2017, well below the better than 2% annual average since WWII. Spending by consumers, businesses and government as well as surging exports all appeared solid in 2Q18. The expansion enters its 10th year this month, building on what is already the second longest expansion on record. Faster growth which has helped to drive the unemployment rate to its lowest level in 18 years, fueled quick corporate profit growth.

Median estimates place GDP growth at 2.8% in 2018, 2.4% in 2019 and 1.8% over the long run. But everyone has growth slowing next year because of falling business and consumer sentiment, reflecting trade disputes with China and many US allies, and uncertainty whether rising business investment is sustainable.

The big concern is the economy overheating – already, it is bumping up against capacity constraints as labour markets tighten. Still, the consensus is that the next downturn will not arrive until 2020. Most economists expect 3% inflation over the next year. What worries me most is the deteriorating global political and strategic environment.

Not so much the economic outlook directly. The world is changing too much, too fast.

So much so, the geopolitical situation is getting worse – open warfare between Israel and Iran, the disgraceful state of Palestine, and uncertainties surrounding Donald Trump and Vladimir Putin, and lack of leadership in Europe. Trade barriers are causing much anxiety. It is as though what’s put in place since WWII isn’t worth a damn anymore.

Europe and Japan

Latest indications from the Brookings-FT Index for Global Economic Recovery (Tiger) show global growth has peaked and momentum has started to fade. Indeed, financial markets are already reflecting mounting vulnerabilities. With weak economic data in 1H’18, Europe and Japan have since cooled. In late 2017, eurozone was still growing at 3.5%: Germany at 4%, France 3%, Italy 2% and Spain 3.5%. But activity slackened to only 1.2% in early April; even Germany recorded a sharp dip – down to only 1%, reflecting waning monetary easing effects and supply-side constraints. The outlook is for a strong above trend upswing for the rest of the year. OECD now expects GDP growth in 2018 to be 2.2% (2.6% in 2017) and in 2019, 2.1%.

For eurozone, the window for reforms is closing – ranging from the implementation of dual currencies for its members to putting European Parliament in charge of economic policy, including the euro-budget. Japanese GDP shrank 0.1% in 1Q18 despite a rise in capital investment. Household spending unexpectedly fell. Still, recovery is expected to be driven by a weak yen brought about by monetary stimulus (BoJ has been buying assets at US$740 billion a year to drive down long-term interest rates). But underlying inflation is stuck at 0.5%. BoJ’s goal remains at keeping real interest rates (after inflation) as negative as possible, as long as the economy performs. OECD forecasts growth in Japan to be 1.2% in 2018 (1.7% in 2017); the same in 2019.

China and BRICS

Many emerging markets (EMs) are still enjoying momentum from 2017, but there is growing concern about rising debt and vulnerabilities to capital flight as interest rates in US rise. For those recently emerged from recession, viz. Russia, Brazil and South Africa, their urge to return to strong levels of activity remains sluggish.

China and India have fewer concerns for their immediate outlook. Still, they need to reform their economies to help raise living standards to catch up. The main challenges will be to execute particular reforms – not just to the financial system but also to SOEs and local governments, including getting rid of corruption.

China’s GDP rose 6.7% in 2Q’18, the slowest pace since 2016. Retail sales held up rather well as did exports. Still, measures to curb rampant borrowing are biting – investments in infrastructure and manufacturing by SOEs and local governments have since slackened. These efforts, in the midst of headwinds from abroad (especially protectionist tariffs), have led to downgrades in growth for the rest of the year. IMF now forecasts GDP growth in China to average 6.5% in 2018 (6.8% in 2017) and about the same in 2019.

Recent depreciation of China’s currency, the yuan, exposes crucial vulnerabilities within the world’s second-largest economy as it faces escalating trade tensions with the US. The currency posted its biggest ever monthly fall against US$ in June (3.4%) and has since lost more ground. This slide marks a departure for the currency often regarded as an anchor of stability for Asia and other EMs.

As Beijing assesses the options, it finds itself between a rock and a hard place because (i) People’s Bank of China (PBoC) intervention means selling its US dollar stash of reserves – which stood at US$3.11 trillion in June; (ii) it could instead raise domestic interest rates, thereby making the currency more attractive which might help to shore up the yuan. But it also risks weakening an already slowing Chinese economy just as the trans-Pacific trade war starts to bite; and (iii) it could impose stricter controls on China’s capital account which will likely spook overseas funds that have rushed into China’s domestic bond and equity markets this year at an unprecedented rate.

However, to internationalise the yuan, China has to keep fund flows relatively unencumbered. The PBoC has sensibly pledged to keep the RMB “generally stable.” In July, China implemented a mix of tax cuts and greater infrastructure spending citing growing uncertainties, as it ramps up efforts to stimulate demand to counteract a weakening economy.

As for India, I wrote extensively on what’s happening there (my July 2018 column: “India: Chugging Along but Needs More Firepower” refers).

What then are we to do

As I see it, China and China-India centred Asia is now the heart of the world economy. Their steady growth has been a source of stability in an otherwise unsteady world.

Of late, developments in China received more scrutiny than usual because of the context: Chinese stock market has since fallen into bear territory, and a growing trade dispute with the world’s largest economy, US. Despite China’s astonishingly sustained expansion, the economy is widely considered vulnerable because growth in output has been underwritten by an even faster increase in debt.

The nation’s gross debt – both public and private – is now estimated at over 250% of GDP. The worry is not just the volume of debt but its quality. China’s domestic policies encourage high savings.

Those savings, held in banks, have been funneled to companies, especially SOEs. The credit quality of the loans is hard to assess but is likely to be uneven. China has since begun to slowly tighten the credit taps, with even tighter rules on shadow banking and more scrutiny for both local government financing and public-private investment projects.

At the same time, a sharp increase in the number of defaults by corporate issuers has revived anxieties about Chinese debt. In my view, it is the tighter credit conditions and defaults, rather than worries about a trade war, that best explain the recent 22% decline in the Shanghai Composite index from its January highs.

Tightening credit policy is also a compelling explanation for the weak macro-economics. Credit growth fell, and growth in fixed investment followed. This appears to be having some effect on consumer sentiment as well.

No doubt, Trump’s tariffs on US$50bil of Chinese imports (and threatens US$200bil more) will have a direct (but unlikely to be catastrophic) impact on growth. But China is now an investment-led rather than an export-led economy.

Still, it is the knock-on effects that are most feared. If the escalation of hostilities leads to a reduction in foreign direct investment in China, the long-term impact could be significant. True, China may be facing a delicate moment economically.

But given China’s deepening role in the world economy, any pain that the US manages to inflict on it would be quickly shared with the US and the broader world – at a moment when Europe’s economy is slowing, and many EMs looking unstable.

On the whole, China’s economy will remain strong and resilient. Whatever happens, I think this won’t change the Chinese situation much.


By Lin See-yan - what are we to do?

Former banker Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.


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Sunday, February 11, 2018

Bitcoin: Utter pipedream

No intrinsic value: Unlike enterprises, bitcoin has no business, no intrinsic value, no cash flows and no balance sheet. — AFP

I JUST returned from a meeting of the Asian Shadow Financial Regulatory Committee in Bangkok.

The group comprises Asian academic experts on economics and finance. Their role is to monitor the state of the world economy and the workings of its financial markets in the light of existing and prospective policies; and draw lessons and give advice on vital public policy issues of current interest to regulators and market practitioners to make the world a better place.

The group comprises 23 professors from 14 countries, coming from a diverse group of universities and think-tanks, including the universities of Sydney and Monash, and of Fudan, Hong Kong and Sun-Yat-Sen in China, Universitas Indonesia, universities of Tokyo and Hitotsubashi, Yonsei and Korea universities, Sunway University, Massey University in New Zealand, University of the Philippines, Singapore Management University, National Taiwan University, Chulalongkorn University and NIDA Business School, University of Hawaii and University of California at Davis, University of Vietnam, and Tilburg University in the Netherlands.

They examined key issues surrounding the theme: “Cryptocurrencies: Quo Vadis?” focusing on the role and activities of the flavour of the month, bitcoin. At the end of it all, they issued the following statement:

“Cryptocurrencies in general, and bitcoin, in particular, have been receiving considerable press of late, driven mainly by wide swings in value in the cryptocurrency exchanges. There are now in excess of 2,500 products considered to be cryptocurrencies and in the last three weeks alone their combined market value has plummeted from US$830bil to US$545bil as of today, of which US$215bil is attributed to bitcoin and bitcoin cash.

To keep this in perspective, however, Apple Inc has a market value of US$880bil as of today. Market value measures the equity value of a business – or what investors are willing to pay for its future profits. Unlike enterprises, however, bitcoin has no business, no intrinsic value, no cash flows, no profit and loss statement, and no balance sheet. It is a speculative instrument.

Cryptocurrencies, including bitcoin, are not considered currency today because they are not a universal means of payment, nor a stable store of value, nor a reliable unit of account. Buyers purchase on the basis that these cryptocurrencies would rise in value. While market value has been the main focus of the current interest, the more important issues are around the role of cryptocurrencies both as financial assets, and the role they can play in transaction settlements, and their implications, if any, on financial stability.

While there is much interest in cryptocurrencies, especially bitcoin, the volume of transactions remains very small currently. For example, total US dollars (cash) in circulation amount to US$1.6 trillion as of today. M3 (broad money) is valued by the Federal Reserve at US$14 trillion. Total US economy assets in 2016 were valued at US$220 trillion. So why the fascination with cryptocurrencies? Supporters of Bitcoin claim it to be a superior store of value to fiat money issued by central banks because its supply is limited by design and therefore cannot be debased. In addition, the technology behind bitcoin, called the Blockchain, provides anonymity to its players. That is why it is a favourite with money launderers, tax evaders, terrorists, drug smuggler, hackers, and anyone who wants to evade the rule of law. Many people who use cryptocurrencies assert that they pay minimal transaction costs mainly because it avoids the cost of financial intermediation.

Still, there is large potential for capital gains because of the wide volatility of its price movement. This is the main driving force behind the popularity of cryptocurrencies like bitcoin. However, there are high risks involved including extreme volatility and opaque, unregulated exchanges that are prone to cyberattacks.

Authorities and regulators worry about bitcoin because they fear it is a bubble. In the event of a bust, investors in bitcoin – they are many, spread over various continents and countries – will be hurt; and they exert pressure on governments to regulate this business in order to protect investors.

In addition, they worry about the impact – in the event that cryptocurrency trading becomes a significant element in maintaining financial stability – in terms of the impact on the transmission of monetary policy and on its effects on the banking system, and most of all, on systemic risk, if any.

Authorities have responded in different way. In South Korea, new regulations today require banks and exchanges to identify who their customers are, imposing greater transparency in the conduct of the cryptocurrency business. On the other hand, Japanese authorities are more liberal. They only require the registration of companies engaged in this business at this time.

Many other authorities, including those in the US, are adopting a wait-and-see attitude while studying the issues, recognising that there may be a role for them to introduce some regulatory measures in the event that the volume and price volatility of cryptocurrency transactions become more and more significant.

In the meantime, government and tax authorities feel uneasy about the impact on revenue collection. Other regulators are worried about crowdfunding through ICOs (initial coin offers). Authorities in a number of countries, including the US, have introduced measures to regulate the issue of new ICOs to ensure that investors are provided with the necessary information before making such investments.

At the same time, central banks in many countries are looking into the desirability and possibility of issuing their own digital currencies, including to counter privately-issued cryptocurrencies.

Recommendations:

1. Bitcoin came into prominence because of an apparent lack of confidence in fiat currency. It is imperative that governments and central banks continue to give priority to (i) protecting the integrity of their currencies; (ii) designing policies to contain inflation to prevent it from debasing the currency; and (iii) strengthening their mandate to promote financial stability over financial development, if needed (including ensure fintech development does not undermine confidence). Also, in cases where authorities do not have the power to regulate the cryptocurrency business, they should actively seek such authority where appropriate.

2. Monetary authorities should be open to creating digital currencies rather than confining their money supply to notes, coins and deposits. But they should do so in a transparent manner and only after careful consultation and study.

3. It is the role of government to warn their citizens and investors about the high risk involved, and ensure transparency in bitcoin activity, and not to unduly introduce more and more regulations that will stifle innovative initiatives. Blockchain technology, for example, does have other useful applications apart from the issue of its use in the creation of digital currency.

Investor protection


As we see today, bitcoin and the other cryptocurrencies are not currencies. Mostly, they reflect speculative activity. Hence, investing and transacting in them involve high risks. It is imperative that investors realise this and approach investing in cryptocurrencies with great caution and with as much information as is available to help them manage these risks.

Investors must fully understand that cryptocurrency prices need not necessarily always rise, particularly because they have no intrinsic value, they could just as easily fall. So investors beware: Caveat emptor.”

Update

The following developments are noteworthy:

> Columbia’s Prof N. Roubini (Dr Doom) claims bitcoin is not a currency. Few price anything in bitcoin. Not many retailers accept it (even bitcoin conferences don’t accept it as payment). And it’s a poor store of value because its price can fluctuate 20%-30% a day. Worse, he labelled it “the mother of all bubbles” because its claim of a steady-state supply is “fraudulent”.
It has already created thee similar currencies: Bitcoin Cash, Litecoin and Bitcoin Gold. Together with the hundreds of such other currencies invented daily, this creation of money supply is debasing the currency at a much faster pace than any major central banks ever did. Furthermore, bitcoin’s claimed advantage is also its Achilles’s heel – for, even if it actually did have a steady supply of 21 million units, it is not a viable currency because the supply won’t track potential nominal GDP growth; hence, prices will become deflationary – the kind of phenomenon that economist Irving Fisher believed caused the Great Depression.

Indeed, the head of the European Central Bank had since declared to the European Parliament that cryptocurrencies are unregulated and “very risky assets. Their price is entirely speculative”. That’s not what we want or need. It’s a pity the FOMO (fear of missing out) of many retail investors will end them in a wild goose ride!

> Over its nine-year history, bitcoin has had five-peak-to-trough falls of more than 70% each. The recent decline offers a dose of reality to new investors – bitcoin dropped to a low US$7,850 on Feb 2 for the first time since November 2017 – crashing 60% from the high of nearly US$20,000 in mid-December. Sentiment has shifted dramatically this year.

On Feb 5, it fell another 4% to US$7,524. Also, the fledging market has taken a number of blows: Facebook has since banned advertisements on it (for being misleading); US Securities and Exchange Commission has accused some latest ICOs as “outright scams”; US and UK largest banks have put up “road-blocks” to financing bitcoins; and the recent Japanese hack theft of 523 million crypto-XEM (worth US$500mil) brought back memories of Mt Gox, which collapsed after a similar hack in 2014.

> Arbitrage traders (buying where it’s cheap and reselling where it is dear) have been active – taking advantage of price differentials in multiple places and different times. They call it “capturing the arb”. Hedge funds, high frequency traders and even amateur enthusiasts are giving it a shot. Price divergences can be due to glitches or network traffic jams. In South Korea, exchanges quote abnormally wide prices reflecting high investors’ demand for bitcoin in the face of strict capital controls – giving rise to a “Kimchi premium” (of as high as 50% above US price; now down to 5% as price disparities are swiftly traded away).

> Concern over cryptocurrency activity is spreading beyond China, Japan, South Korea and India. This prompted the governor of the Bank of England, who also chairs the Global Financial Stability Board, to voice his unease over the anonymity embedded in blockchain technology underlying their use, especially for illicit activity (including money laundering). He disclosed that it would be on the agenda at the next G20 meeting. Tax authorities have also expressed concern over the under-reporting of capital gains tax.

> Bitcoin futures trading on Chicago’s CME and CBoE exchanges have been slow to catch fire – at the pace of a “slow walk”.

What then, are we to do

Reality check: Bitcoin is proving that cryptocurrencies can erase wealth as fast as they create it. In January 2018 alone, it wiped off US$45bil from its US$200bil in market value generated in all of 2017 – the biggest one-month loss in US dollar terms in its short history. Since then, more value is being lost. For most economists and finance experts, they don’t represent an investable asset – there are liquidity issues, safety issues, exchange issues; most of all, they have no intrinsic value.

Can’t realistically put a fix on their fair value. They are for speculators who are prepared to lose everything. Of course, its something else for those who use them for illicit activity (home to criminals and terrorists), including money laundering. Anonymity means you are potentially closing a chain, while at somewhere along it had some illicit activity that cannot see the light of day.

Fair enough, these concern regulators. But we shouldn’t lose sight of the huge range of opportunities presented by the underlying technology – a view shared by many in relation to raising the efficiency of payment systems. Regulators are right to want to regulate crypto but also, continue to encourage innovation on blockchain. As I see it, so far in 2018, bitcoin has been a total dud. The list of factors driving its decline is growing, especially rising regulatory clampdown occurring around the world.

So, the cryptocurrency market has fallen on tougher times. For sure, Bitcoin has been highly profitable for many investors. Indeed, there continues to be strong interest among millennials.

Bottom line: the year so far has been terrible for bitcoin. But the fundamental positive story for crypto appears to remain intact. Protecting consumers should make it harder for charlatans to sell digital dust. There is a point where it goes from “buying on the dip” to “catching a falling knife”. Only time will tell. So, beware!

NB: Following global regulatory crackdown, bitcoin’s price has on Feb 6 fallen to a low of US$5,947, wiping out over US$200bil so far this year. Bitcoin’s market cap is now US$109bil, about one-third of the total crypto market (that’s down from 85% this time last year). The Bank for International Settlements (banker to central banks) has now condemned bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster” (refers to huge amounts of electricity used to create it) and warns it can even become a “threat to financial stability”.


By Lin See-yan - what are we to do?

Former banker Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.



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Thursday, December 8, 2016

Global Reset 2016~2017


In a world facing challenges and uncertainties, embrace opportunities for success through innovation.

“I went looking for my dreams outside of myself and discovered, it's not what the world holds for you, it's what you bring to it. –Anne Shirley"

THE world is currently at a paradox. Tensions and uncertainty for the future are rising in times of prevailing peace and prosperity. While changes are taking place at an incredibly fast speed, such changes are presenting unprecedented opportunities to those who are willing to innovate.

Recently, most global currencies had weakened against the US dollar (USD). This may give rise to some concern, but it is worth placing in proper perspective that most countries would trade with a few countries instead of just one. Furthermore, we are living in a world with low economic growth, increased mobility and rapid urbanisation.

In such a global landscape, it is important to embrace change and innovation in a courageous way to shape a better future. In L.M. Montgomery's Anne of Green Gables, Anne Shirley said, "I went looking for my dreams outside of myself and discovered, it's not what the world holds for you, it's what you bring to it."

Paradox, change and opportunity

In the World Economic Forum Global Competitiveness Report 2016-2017, World Economic Forum head of the centre for the global agenda and member of the managing board Richard Samans stated that at a time of rising income inequality, mounting social and political tensions and a general feeling of uncertainty about the future, growth remains persistently low.

Commodity prices have fallen, as has trade; external imbalances are increasing and government finances are stressed.

However, it also comes during one of the most prosperous and peaceful times in recorded history, with less disease, poverty and violence than ever before. Against this backdrop of seeming contradictions, the Fourth Industrial Revolution brings both unprecedented opportunity and an accelerated speed of change.

Creating the conditions necessary to reignite growth could not be more urgent. Incentivising innovation is especially important for finding new growth engines, but laying the foundations for long-term, sustainable growth requires working on all factors and institutions identified in the Global Competitiveness Index.

Leveraging the opportunities of the Fourth Industrial Revolution will require not only businesses willing and able to innovate, but also sound institutions, both public and private; basic infrastructure, health and education, macroeconomic stability and well-functioning labour, financial and human capital markets.

World Economic Forum editor Klaus Schwab stated in The Fourth Industrial Revolution that we are at the beginning of a global transformation that is characterised by the convergence of digital, physical and biological technologies in ways that are changing both the world around us and our very idea of what it means to be human. The changes are historic in terms of their size, speed and scope.

This transformation – the Fourth Industrial Revolution – is not defined by any particular set of emerging technologies themselves, but by the transition to new systems that are being built on the infrastructure of the digital revolution. As these individual technologies become ubiquitous, they will fundamentally alter the way we produce, consume, communicate, move, generate energy and interact with one another.

Given the new powers in genetic engineering and neurotechnology, they may directly impact who we are, and how we think and behave. The fundamental and global nature of this revolution also pose new threats related to the disruptions it may cause, affecting labour markets and the future of work, income inequality and geopolitical security, as well as social value systems and ethical frameworks.

A dollar story

When set in a global landscape where there is uncertainty for the future, when compared to other countries, Malaysia's economy is performing quite well.

ForexTime vice president of market research Jameel Ahmad said, “When you combine what is happening on a global level, the Malaysian economy is in quite an envious position.”

For 2016, the USD has moved to levels not seen in over 12 years. The dollar index is trading above 100. This was previously seen as a psychological top for USD.

The Malaysian ringgit (MYR) is not alone in the devaluation of its currency. All of the emerging market currencies have been affected in recent weeks.

Similarly, the British £(GBP) has lost 30% this year, falling from US$1.50 to US$1.25 per GBP. The Euro (EUR) has fallen from US$1.15 to US$1.05 in three weeks.

The China Yuan Renmenbi (CNY) is hitting repeated historic lows against the USD. The CNY is only down around 5%.

Jameel believes that the outlook for the USD will be further strengthened. While the dollar was already expected to maintain demand due to the consistent nature of US economic data, the levels of fiscal stimulus that US Presidentelect Donald Trump is aiming to deliver to the US economy will encourage borrowing rates to go up.

This means that it is now more likely than ever that the Federal Reserve will need to accelerate its cycle of monetary policy normalisation (interest rate rises).

Most were expecting higher interest rates in 2017. Trump has also publicly encouraged stronger interest rates. However, when considered that Trump is also promising heavy levels of fiscal stimulus, there is a justified need for higher interest rates, otherwise inflation in the United States will be at risk of getting out of control.

The probability for further gains in the USD due to the availability of higher yields from increased interest rates will mean further pressure to the emerging market currencies.

With populism resulting in victories in both the United States’ presidential election and the EU referendum in the United Kingdom in 2016, attention should be given to the real political issues in Europe and the upcoming political elections in 2017, such as those in Germany and France.

Jameel said, “Until recently, political instability was only associated with developing economies. We are now experiencing a strong emergence across the developed markets. This might lure investors towards keeping their capital within the emerging markets longer. Only time will tell.”

In Malaysia’s case, the economy is still performing at robust levels, despite slowing headline growth. Growth rates in Malaysia are still seen as significantly stronger than those in the developed world.

There are going to be challenges from a stronger USD and other risks such as slowing trade, but the emerging markets are still recording stronger growth rates than the developed world.

Adapting to creative destruction


In a world where changes are taking place rapidly, the ability to adapt to changes plays an important role in encouraging innovation and growth. Global cities are achieving rapid growth by attracting the talented, high value workers that all companies, across industries, want to recruit.

In an era where 490 million people around the world reside in countries with negative interest rates, over 60% of the world’s citizens now own a smartphone and an estimated four billion people live in cities, which is an increase of 23% compared to 10 years ago, these three key trends are shaping our times.

Knight Frank head of commercial John Snow and Newmark Grubb Knight Frank president James D. Kuhn shared that the era of low to negative interest rates has reduced investors’ expectations on what constitutes an acceptable return. The financial roller coaster ride that led to this situation has made safe haven assets highly sought after.

A volatile economy has not stopped an avalanche of technological innovation. Smartphones, tablets, Wi-Fi and 4G have revolutionised the spread of information, increased our ability to work on the move, and led to a flourishing of entrepreneurship.

Fast-growing cities are taking centre stage in the innovation economy and in most of the global cities, supply is not keeping pace with demand for both commercial and residential real estate.

Consequently, tech and creative firms are increasingly relying upon pre-let deals to accommodate growth, while their young workers struggle to find affordable homes.

As the urban economy becomes increasingly people-centric, regardless of a city being driven by finance, aerospace, commodities, defence or manufacturing, the most important asset is a large pool of educated and creative workers.

Consequently, real estate is increasingly a business that seeks to build an environment that attracts and retains such people.

Knight Frank chief economist and editor of global cities James Roberts said, “We are moving into an era where creative people are a highly prized commodity. Cities will thrive or sink on their ability to attract this key demographic.

“A characteristic of the global economy in the last decade has been the phenomenon of stagnation and indeed decline, occurring alongside innovation and success. If you were invested in the right places and technologies, the last decade has been a great time to make money; yet at the same time, some people have lost fortunes.

“The locations that have performed best in this unpredictable environment have generally hosted the creative and technology industries that lead the digital revolution, and disrupt established markets.” The rise of aeroplanes, automobiles and petroleum created economic booms in the cities that led the tech revolution of the 1920s and 30s. Yet elsewhere, recession descended on locations with the industries that lost market share to those new technologies like ship building, train manufacturing and coal mining.

In a world where abundant economic opportunities in one region live alongside stagnation elsewhere, it is not easy to reconcile the fact that countries that were booming just a few years ago on rising commodity prices are now adapting to slower growth.

Just as surprising are Western cities that are now thriving as innovation centres, when they were dismissed as busted flushes in 2009 due to their high exposure to financial centres.

Roberts said, “This is creative destruction at work in the modern context. The important lesson for today’s property investor or occupier of business space, is to ensure you are on-the ground where the ‘creation’ is occurring and have limited exposure to the ‘destruction’. This is not easy, as the pace of technological change is accelerating at a speed where the old finds itself overtaken by the new.

“However, real estate in the global cities arguably offers a hedged bet against this uncertainty due to the nature of the modern urban economy, where those facing destruction, quickly reposition towards the next wave of creation.”

The industries that drive the modern global city are not dependent upon machinery or commodities but people, who deliver economic flexibility.

A locomotive plant cannot easily retool to make electric cars, raising a shortcoming of the single industry factory town. Similarly, an oil field in Venezuela has limited value for any other commercial activity.

However, a modern office building in a global city like Paris can quickly move from accommodating bankers in rows of desks to techies in flexible work space. Therefore, there is adaptability in the people in a service economy city which is matched by the city’s real estate.

In the people-driven global cities, a new industry can redeploy the ‘infantry’ from a fading industry via recruitment. Similarly, the professional and business service companies that served the banks, now serve a new clientele of digital firms.

In contrast, manufacturing or commodity-driven economies face greater barriers when reinventing themselves.

Today, landlords across the world struggle with how to judge the covenants of firms who have not been in existence long enough to have three years of accounts, but are clearly the future.

Consequently, both landlord and tenant need to approach real estate deals with flexibility. Landlords will need to give ground on lease term and financial track record, and occupiers must compensate the landlord for the increased risk via a higher rent.

Another big challenge for the Western global cities will be competition from emerging market cities that succeed in repositioning themselves away from manufacturing, and towards creative services. The process has started, with Shanghai now seeing a rapid expansion of its tech and creative industries.

The big Western centres still lead in services, but the challenge from emerging markets cities did not end with the commodities rout. They are just experiencing creative destruction and will emerge stronger to present a new challenge to the West.

From Mak Kum Shi The Star/ANN  

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