Saturday, May 3, 2008

Morgan Stanley Says Sell Asian Currencies on Growth Concerns

I made an entry in the beginning of April: Forget Subprime, In Asia the big fear is Inflation. Things start to pick up steam, Morgan Stanley recommends their clients to sell Asian currencies. Translation: bonds and equities will have some headwinds.

May 2 (Bloomberg) -- Investors should sell Asian currencies against the U.S. dollar on prospects the region's central banks will let their currencies weaken to revive faltering growth, according to Morgan Stanley.

Asian central banks from China to Singapore, which have allowed stronger exchange rates to battle inflation in recent months, may soon reverse their currency policies to bolster growth, Morgan Stanley's London-based analysts Stephen Jen and Charles St-Arnaud wrote in a note yesterday. The region's currencies have risen 3 percent against the U.S. dollar since August, according to the Bloomberg-JPMorgan Asia Dollar index.

``As soon as growth decelerates, policies should shift to protect growth'' as Asia is not single-minded about inflation risks, the analysts said. ``For the first time in two years, we are recommending that investors be cautious about short U.S. dollar-Asian ex-Japan positions.''

Not all Asian currencies are hopeless though. They said the winners are:

“The `Greater Chinese' currencies, the Singapore and Taiwan dollars, along with the yuan, may ``outperform most other currencies,'' Morgan Stanley said, without elaborating.”

Yuan = Ringgit also? And most perceived we are a mini Brazil. When they are bearish on commodities, our plantation sector took a beating yesterday ( IOI Corp slipped below $ 7). So it is hard to say. We still need to be cautious about regional and contagion effects.

The big boys begin to get bullish with the US dollars as the economy data from the US seems to be encouraging, Q1 ’08 GDP growth of +0.6% and job losses came in better than forecast that reinforced the Fed reserve will halt cutting rate further – good news to US $.

WASHINGTON (MarketWatch) -- Job losses decelerated in April, suggesting that the nation's economic downturn may be short and shallow rather than long and severe.

Nonfarm payrolls fell by 20,000 -- far fewer than the average 80,000 jobs per month lost during the first quarter of the year, Labor Department data showed.
The decline was much less than expected. Economists surveyed by MarketWatch expected job losses of 78,000.

Looking at the sector of the job losses, factory (mostly durable goods) and construction payrolls fell quite a bit but offset by service producing industries (health care, professional services, tourism and leisure industries). Many will argue, the housing and consumer spending sector did show some weaknesses but not weak enough to pull down the whole economy. The decoupling camp will get their champagne glasses ready.

If you are in Jim Rogers, George Soros and Marc Faber camp, you will find the argument is not making any sense. Why react with just with a few data like that? They believe we are in a de-leveraging environment - not a normal recession, we talking about credit crunch and a recession. Consumers are afraid to borrow. Banks are afraid to lend. Credit costs are rising despite of the Fed has been cutting rates. Businesses are afraid to expand and loan growths are slowing down significantly. All these will eventually hit the economy.

If what they argue turned out to be true, when can we see the full-blown crisis? Many saw the credit crunch will one day blow up in 2003 itself. The Fed did not raise the rate fast enough when the 2001 recession was over but it did not hurt the stock market until late October 2007.

Jim Rogers has been saying out loud experience tells him to short more US $ when US $ rebound.

The other point is they think most analysts are quite complacent. Many have not cut their earning estimates yet, still keeping double digits growth. When credit costs continue to rise, the earning disappointments will catch most off-guard – especially those bought financial stocks.

My dear readers, as you can see, the above arguments are quite complex if one wants to adopt market timing approach investing. It is a shifting goal post. When will it happen? Nobody knows, that's make market timing difficult - but one thing for sure - be careful when others are greedy and be greedy when others are fearful like Buffet has always said.

No comments: