While 2015 has seen some of the steepest falls in emerging markets, next year could see a reverse in the situation. Over the last few years part of the problem has been the drag effect caused by higher currencies, commodity price increases’ and higher wage levels. However, many of these factors have reversed over 2015 and many emerging markets may be set for a strong growth period. Amongst them are the following;

• EM growth is already at the weakest in 20 years barring the 2008 crisis.
• Global trade is already flat on its back, while emerging markets trade is in clear recession. In volume terms EM imports have shrunk 2.6% in first 8 months of 2015. Global growth is weak, but global trade is much weaker than has been associated at this level of growth, suggesting a change in the beta of trade growth to output growth. Weak exports will hardly be a surprise for anyone. In value terms, trade may also improve next year, because of weak commodities and a stronger USD.
• The deficit in certain countries current accounts is slowly narrowing. India and Indonesia deficits don’t present a big problem in themselves, and the larger deficits of Brazil, South Africa, Turkey, Colombia and Peru have also shrunk in USD terms.
• Commodity prices have already plummeted: Based on CRB raw industrial prices, commodities have now slipped to their lowest average level of the last 20 years. They have been falling since Q2 2011, but the decline since April 2014 has been significant. Coal, oil, iron ore, nickel and Aluminium are particularly weak.
• Over the last 5 years, emerging market equities have already underperformed developed market equities by 60% and in addition to this emerging market bonds have also underperformed US T Bills by 27.5%. The USD has rallied 43% against a spot basket of 20 liquid EM currencies and EM sovereign spreads have been flat against an average of US and EU high yield spreads, despite being rated higher.

In addition to this, we may well see other factors come into play, such as China’s new stimulus package, which will help boost its economy. With a recovering China, this will boost the entire region and even global growth. In addition to this we may see reforms from a new government in India or Indonesia as well as the chance for reducing sanctions on Russia and Iran.

While EM’s are likely to continue to experience volatility in the short term it seems increasingly likely that the worst is over and it may be time to once again begin considering a healthy level of exposure.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Love or hate stories that are negative about the currency that you use on a daily basis, it is something we all need to understand and more importantly plan for!

I held a seminar two weeks ago and I was surprised with how many people agreed that Malaysia’s currency is not going to recover quickly. The room was filled with Malaysian citizens and from my previous seminar experiences, Malaysian’s will normally fight for the positives and why their currency will recover and things will be Ok……. but this time, something was different, it was obvious that concern for livelihood outweighed any hope for their government to right the freefalling currency.

 The first thing to look at is Malaysia’s growth…..or should I say Putrajaya’s quote of 4.5% – 5.5%. This to me is a bold statement and with the current political issues, economic issues, I find this hard to believe. One issue to begin with is the way Asia and the West state their figures in the first place.

In the West, it’s common for predictions to be put out there and then often revised up. This is most likely to give that positive news that they beat predictions and confidence grows. Whereas in the East it is the other way around, figures are stated and then often revised down. I for one fear a prediction of 4.5% – 5.5% is a little too confident and I would like to explain why with facts and figures.

“According to S&P, Malaysia has the highest personal debt among 14 Asian economies, with the rate jumping to 88 percent of gross domestic product from around 60 percent in 2008.” 07/09/2015

In addition to this, Moody’s uprated Malaysia rating to a neutral outlook in June, however were in KL as little as three weeks ago to reconsider this and I fear with the current climate, Malaysia will be put back to A- negative outlook.

Here are a few facts that I have pulled from media recently.

• Malaysia’s manufacturing sector recorded a sharp decline in activity in August, with new orders contracting at the fastest rate since September 2012
• The headline Purchasing Managers Index (PMI) dropped to 47.2 ― down from 47.7 in July ― which the index rated as the “strongest deterioration in operating conditions” for Malaysian manufacturers in nearly three years
• New orders at Malaysian goods producers contracted for the sixth month in a row
• Moreover, the rate of decline was the second-sharpest in the series history
• Job hiring have posted a 26 per cent decline this year
• The Malaysian equity index fell 15 per cent from its July 2014 high
• The MYR currency is Asia’s worst performer this year as political uncertainty clouded the outlook amid an emerging-market selloff

Now let me cover a couple of MAJOR factors as to why Malaysia’s RM will not recover quickly and the economic outlook is poor.

Putrajaya have played down the importance of Oil and said that Malaysia has many other factors that will assist in good GDP figures in 2015.

Before I disprove Putrajaya’s poor comments, let me start with Oil.

In 2014 oil revenue were 31% of Malaysia’s GDP and for 2015 this is expected to fall to 22% based on oil at USD55.

Oil has faltered this year and gone down as far as USD38. This in itself should mean that even a 22% prediction will most likely be in the teens.

Many pro government writers begin telling you that we should not worry, our economy is based on so much more…….so what are they?

• Tourism: Q1 stats show 600,000 less visitors and this expected to be worse in Q2, not to mention the world media damaging Malaysia as a peaceful country. This will of course cause holiday makers to reconsider coming to Malaysia for a holiday, despite a weak currency. What family would risk their children’s safety when all they see is multiple rallies, murders, corruption! Whether these stories are true or false, it paints Malaysia in a very bad light and I believe tourism figures to be very bad in Q3 and Q4.
• Natural Gas : Prices have been down and very low for a decade and I will not dwell too long on proving this, you can have a google and see this for yourself
• Banking & Services: Scandals and a falling RM, destroy confidence in the markets. Whether stories are true or not, people simply do not trust the Malaysian banking sector at the moment and large amounts of deposits are leaving the country
• Palm Oil : Production is drastically down since December 2014 where it dropped 11% and figures do not seem to be recovering

I do not for see the RM bouncing back anytime soon and I fear that even with the government’s new stimulus package this will simply flat line it at current levels for a few weeks/months. Ultimately, Asia is in crisis, with the RM being the bottom of the pile.

Predictions:

• Numerous rating agencies will initially say that Malaysia is being watched stringently and most likely they will be put on a negative rating or even worse drop the A- lower. (Fitch: Recently moved this up to A- with a neutral standing)
• International perception of Malaysian markets will go from bad to worse, because bad news sells!
• Banks will become less willing to lend and debt collection will be paramount. Mr Chaucer on BFM in September clearly shows that lending and banking deposits are close to 1 : 1. This means that lending is now drying up and house and car loans are already decreasing
• The knock on effect of this is the housing market, which I have said in previous stories that it is way overpriced and you can see on the graph below that transactions have gone to a third of where they previously were. Event those property agents that always tell us everything is fine can have a dose of reality now that they see that housing is the next thing to go down.
• These low house sales, drying up of lending and negative equity will result in home owners owing more than their homes are worth and repossessions will rise. I witnessed this in the UK market crash and Malaysia has a lot of similar alarm bells ringing. Even those people that think landed property will be fine………I will prove myself right in the coming quarters. Malaysia’s house prices whether in apartments or landed, will fall and I can’t see them coming back quickly. People are renting houses at less than 2% rental yield……..my house is 1.8% for my landlord, so I can see this with my own situation.

• This will be the same with car loans & those people who can’t even afford a 1 bedroom apartment but drive a brand new Porsche Cayenne on finance will also start to worry!
• The housing market correction, bad economic data, job losses increasing, oil prices staying down and corruption issues will take a minimum of 2 – 3 years to put right and the low RM rate is here to stay for some time.

I consider Malaysia my home and I see that it has so much potential, but at the moment, economically, politically and perception is not great. The best thing for people to do is speak to a professional about how to limit their exposure to these issues and maybe consider investing away from Malaysia. I for one, certainly think that anyone holding too much RM will be best advised to move it to a strengthening currency.

Thanks for reading

Stuart Yeomans

Farringdon Group CEO

For a country currently grappling with its economy, a rejuvenating new multi-billion dollar plan was recently announced by Prime Minister, Najib Razak. Since the dawn of 2015, the prime minister has been constantly facing a slower pace of economic growth and a currency losing nearly a fifth of its value versus the US Dollar.

The government is apparently ready to throw in billions of dollars into financial markets while investigators continue to probe a troubled state investment fund 1Malaysia Development Berhad (1MDB) which was formed by Mr Najib himself in 2008, and who also sits as chairman on its advisory board. In a speech on Monday, Mr. Najib assured that his government “remains committed to helping solve investigations in relation to the investments of 1MDB transparently.” He added that all 1MDB’s dealings will be “transparent and market-friendly.” As the Prime Minister deals with accusations of corruption, he is definitely keen on concentrating on the economy instead.

External shocks aren’t the only reasons for the recent worries over Malaysia’s economy – as repeatedly outlined by the Najib administration – citing the skyrocketing US dollar and slowdown in China, a major trading partner. Weak commodity prices and a slowing Chinese economy have hit Malaysian markets hard and added pressure on the Prime Minister, as evidenced by recent street demonstrations challenging his rule.

Amidst these worrying developments, the much-talked about Malaysian leader introduced the “Special Economic Committee”(JKE) last month, whose members include his brother, CIMB Bank chief, Nazir Razak, who coincidentally, has been a huge critic of 1MDB – as well as Tan Sri Nor Mohamed Yakcop, the man famed for implementing a currency peg and capital controls that the country put in place following the 1997 Asian financial crisis. But the Najib administration has vowed not to repeat those measures, insisting that economic fundamentals are resilient and will remain unaffected by current pressures.

Also on Monday, Mr Najib added that a state firm called ValueCap would be investing 20 billion Ringgit ($4.6 billion) in a few of the country’s worst-hit stocks and advised other quasi-independent state firms with operations overseas to cash in those investments and return to reinvesting in Malaysia. Arguably, this hasn’t been the first time Mr. Najib has managed to leverage state muscle to boost the economy and markets.

It is vital to note that the Ringgit is currently Asia’s worst performing currency this year trading at over 4.3 to the US Dollar all of last week and ending Friday at 3.05 to the Sing dollar. But analysts believe the measures announced on Monday may cushion the slide for the short term.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

The last week has seen some of the largest declines in asset markets since 2008. The drops have mainly been kicked off, by concerns over the Chinese economy and the US Federal Reserve’s move to potentially raise interest rates in September.

European markets are down by 18% and nearing bear market territory. The US market has also been effected and is entering a correction phase with drops of 10%.

Emerging markets have been hit the hardest and this is especially apparent in markets linked to China. We have had virtually no exposure to emerging markets in our portfolios, for the last two years, so overall we have outperformed the markets.

In addition to drops in the equity markets, commodities have also been hit hard. Oil prices have dropped as low as $38 a barrel overnight.

While markets have dropped substantially over the past few days, it is our view that there has been a severe overreaction. China is experiencing difficulties; however, it seems highly likely that China experienced a recession at the start of this year. This was largely caused by a reduction in lending to local governments, due to internal accounting changes in china. These issues have now been resolved and property prices in China have begun to increase. The US economy continues to grow and Europe is now moving out of recession.

In addition to the fall in the price of oil and the devaluation of the Chinese currency, there will now be even less reason for the Federal Reserve to begin raising rates in September. With this in mind we expect to see equity markets rally over the next few weeks, with main markets returning to previous highs by Christmas.

The oil market may take longer to correct and we see a 50/50 chance of further drops to as low as $35 a barrel. However, with oil prices this low we see a fantastic opportunity in the longer term.

It is our intent to maintain equity positions until the middle of September, before reducing holdings and making further purchases into oil. If you have any intention of making any additional investments, the next few weeks will likely present a significant opportunity to take advantage of.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

Gold has slumped to its lowest price in more than 5 years; losing around 4%. It has gone as low as $US 1,088 an ounce, since March 2010. As a precious metal, it serves as a commodity used in many areas, such as electronics, computers and dentistry. However, it mainly acts as a store of value and is regularly used as an insurance policy against political upheavals. Unlike any other assets, gold brings no income and can be costly to store. Thus, the investors that favour it, are not so happy.

Stronger US Dollar and Higher interest rates

Gold has been falling out of favour, since the US dollar began to strengthen again. Historically gold usually trades in the opposite direction of the dollar. One of the major issues with a stronger US dollar, is that it makes dollar-dominated commodities more expensive for buyers who do not hold USD. This tends to reduce the demand and, consecutively pushes the prices lower.

Another of the main factors we must consider for the drop in the value of gold, is the revival of the American economy, which could soon begin to raise their rate of interest. Any rate hike, usually increases the opportunity cost of holding zero-yielding assets.

Massive selling in China and the Greek debt crisis

Another reason behind the fall in gold, could be from the world’s biggest consumer. China now owns 1658 tonnes of gold bullion, which is less than what was predicted by certain analysts.

By the end of June this year, China had increased its holding by 57% and became the 5^th largest holder of the precious metal. According to reports, 33 tonnes were sold in the Shanghai spot market on Monday, as investors sought to shift focus to other avenues.

Another reason behind this reduction in the price of an ounce, could be because of the Greek debt crisis. In order for the debt to be repaid, the risk premium that is attached to gold is weakened.

If the price of gold falls, countries that have invested in a lot of gold will be affected tremendously. Countries like Kazakhstan, Russia and Turkey boosted their gold holdings in early March this year, only to know later that the price had slumped. According to the BBC, Australian mining companies’ share prices had dropped around 10- 13% on Monday.

Watch this space, very interesting times for Gold ahead.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

With the ever changing negotiations between the Greek government and its creditor’s, one of the key questions to ask is; what is the likely impact on the rest of Europe and the world, if Greece leaves the Euro and defaults on its debts?

The Greek economy is very small in relation to the Eurozone. It only makes up about 1% of the total GDP of the currency area. As such, the knock on effects to the Eurozone of the Greek economy sinking even further, are likely to be very limited.

The vast majority of Greek government bonds are now owned by international government owned organizations, like the ECB and the IMF. With that in mind, a Greek default is unlikely to trigger a selloff in international banks and bond markets, as we saw in 2008 following the Lehman Crisis. Also unlike the 1998 Russian default, the Greek default has been well anticipated.

While the cost of insuring Greek government debt has rocketed, the cost to insure the other PIGS economies Portugal, Ireland and Spain has not changed much. So we are unlikely to see a crisis spread to other European nations.

Mario Draghi can potentially print EUR 4 trillion from the European Central Bank and this is like pointing a big bazooka at Europe; hence we are even less likely to see a spike in other European government bond rates.

The biggest losers in any potential Greek default would be the other countries that have lent them the money. However Germany is by far the biggest contributor to Greece and has estimated that a Greek default will only cost them around EUR 1 billion per year from 2020 onwards. The assessment in Berlin may well point to the fact that the never ending uncertainty of Greece staying in the Euro is costing even more.

This may be the reason that Berlin and others seem completely unwilling to compromise with the current Greek government.

While a Greek default will no doubt reduce European investment markets and weaken the Euro itself; it will most likely be a short term drop, leading to a much larger pick up after a few months. Markets hate uncertainty and if Greece is finally out of the Euro, a great deal of uncertainty will be removed.

I hope you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia