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Another risk of market crash? Warning bells ringing

Publication Date : 11-08-2014

 

The warning bells on the current emerging markets funds frenzy are out again – this time from Reserve Bank of India (RBI) governor Raghuram Rajan.

Expressing his concerns on investors leaving these markets all at once, Raghuram said it was a “big hope and prayer” that there will be a way to unwind everything steadily.

Global markets are at risk of “crashing” should investors start bailing out of risky assets created by the loose monetary policies of developed countries, said the former chief economist of the International Monetary Fund in a interview picked up by the Economic Times of India.

He compared the current times to those of the Great Depression in the 1930s when countries were involved in competitive devaluation.

The situation is similar now with the accommodative monetary policies being pursued by central banks.

“We are taking a greater chance of having another crash at a time when the world is less capable of having another crash,’’ he was quoted as saying.

According to the International Institute of Finance, portfolio capital flows to emerging markets in July had hit a two-year high, said the Singapore Business Times (SBT) recently.

The focus now is on how these sudden inflows are to be unwound by the little regulated hedge funds.

By now, there should be some consciousness among the large funds that they have to act more responsibly as their large volumes can cause considerable volatility.

All said, Singapore’s sovereign wealth fund sees more value in emerging markets than developed ones.

In fact, GIC Pte Ltd is exploring further investments in the technology sectors of emerging markets, said Reuters.

“The prices in developed markets have gone up a lot relative to the fundamentals, whereas emerging market asset prices have lagged substantially,” GIC chief investment officer Lim Chow Kiat was quoted as saying.

A lot of information technology (IT) companies in emerging countries require capital as they are growing quickly, he said, as GIC took up stakes in Chinese and Indian IT companies.

GIC is specific about its investments in niche segments like IT in emerging markets.

It is a serious investor and studies fundamentals of companies rather than just being involved in the fickle portfolio flows.

Singapore has put in place a slew of measures aimed at improving market discipline and protecting its image as a financial centre.

Following the penny stock fiasco, it had conducted consultations on these wide-ranging measures which it nailed into place recently.

By early next year, companies that commit a series of related breaches in listing rules can be fined up to S$1 million (US$800,000), said the SBT.

And by the middle of 2016, contra trades will need to be backed by collateral that represents 5 per cent of the trades’ daily open-position on a net basis.

To address concerns over the Singapore Stock Exchange (SGX) being a stock market operator and regulator, there will be disciplinary, advisory and appeals committees for listings by early next year.

To improve retail investors’ access to securities, the board lot size will be reduced to 100 shares from 1,000 shares by the start of next year.

A minimum trading price of 20 Singapore cents will be imposed for only mainboard listings.

More than 200 listed companies have shares that trade under 20 Singapore cents; they will have about 18 months from now to meet this new criterion – mainly through a share consolidation – before they are put on a watch-list, said the SBT.

Besides disciplinary measures, the SGX is also working to improve the trading and appeal of its companies.

Constant evaluation of the status of its companies and sensitivity to investor concerns will certainly improve the shine on the exchange.

 

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