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Warning to investors in emerging markets

Publication Date : 04-08-2014

 

Investors who are channelling funds into emerging markets at record highs should note that growth in these economies is expected to slow down.

The growth rate of emerging economies in Asia and elsewhere is set to slow to 5 per cent on average over the next five years compared with 7 per cent in the run-up to the 2008 global financial crisis, according to the Singapore Business Times (SBT), quoting a report by the International Monetary Fund (IMF).

This lasting slowdown from former growth peaks threatened to have an adverse “spillover” impact on recovery in advanced economies, which in turn suggested “spillback” effects on emerging economies, said the IMF.

“Emerging markets have rebounded strongly from last year’s taper tantrum and are on track for record inflows this year, propelled by avid risk appetite and little concern about the prospect of rising global interest rates,” Institute of International Finance chief economist Charles Collyns was quoted as saying.

Investors are cautioned over the impact of money tightening in the United States and elsewhere – whether it is a sign of recovery in advanced economies or caused by market concerns over financial stability.

If it was over financial stability, then emerging markets could suffer prolonged damage, said the IMF.

As usual, a sudden increase in portfolio inflows is to be viewed with caution as they can leave as suddenly as they appear.

A sunnier outlook for new listings in the second half of the year is likely to see more companies raising funds from Singapore investors.

Several mineral, oil and gas companies, particularly explorers and producers, and offshore supply vessel companies had made enquiries or had kick started the initial public offering (IPO) process, said the SBT, quoting investment bankers, lawyers, audit firms and analysts.

There were also companies from China, Malaysia and Indonesia, shipping businesses, food and agriculture companies, real estate firms, Singapore companies looking to spin off subsidiaries, and secondary listings, added the newspaper.

As the IPO process normally takes six to eight months, there is likely to be a stream going into the first quarter of next year.

“Singapore and Southeast Asia will continue to be areas of interest, and we’ll likely see an increase in deal flow in the fourth quarter,” Edward Lee, Southeast Asia head of equity markets at Deutsche Bank was quoted as saying.

“Across the broader Asia region, we expect to see more issuance from technology companies and more activity in the financial institutions space,” Lee added.

Amidst such positive sentiment, the Malaysian IPO market should also see some deal flows.

Malaysian capital market players should be more proactive in their marketing and development of better sentiment in their market.

The Lloyds Banking Group (pic) suffered a double whammy when it was hit with 218 million pounds (US$366.8 million) of fines for rigging the benchmark London Interbank Rate (Libor), and another 8 million pounds (US$13.5 million) for rigging the repo rate, said The Guardian.

For the first time, the 24 per cent taxpayer-owned bank was fined for rigging the repo rate which was used to calculate the scale of the fees paid to the Bank of England for its special liquidity scheme (SLS).

The SLS was created to pump money into the financial system amid fears banks were facing a credit crisis.

Bank of England governer Mark Carney said this scheme was intended to help banks get through the worse of the financial crisis as Lloyds TSB rescued HBOS, which owned Halifax and Bank of Scotland, The Guardian added.

“Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved,” Carney was quoted as saying.

After so many lessons learnt, traders involved should realise that they have to tread ever so carefully.

Getting caught in such rigging schemes may only show that they deserve the punishment meted out.

 

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