Year: 2015

The ringgit has weakened by almost 5% year-to-date against the US dollar. Yet, Bursa Malaysia has remained at levels above 1,800 points.

STOCK markets that remain strong or unaffected amid a weakening currency represent a new conundrum for investors.

The ringgit has weakened by almost 5% year-to-date against the US dollar, and is among the worst-performing currencies in the region. Yet, Bursa Malaysia has remained at levels above 1,800 points. It is 3.1% up since January this year.

The euro has depreciated even more – 13% – against the dollar since the beginning of the year. Yet, the markets are soaring on the back of the European Central Bank embarking on a quantitative easing programme that would result in a weaker currency in Europe.

The Brazilian real has lost almost 24% against the US dollar due to a host of reasons, ranging from a multi-billion corruption scandal at Petrobras, the national oil company, to its president Dilma Rousseff facing mounting opposition to her rule. Despite the Brazilian real depreciating, the stock market has remained somewhat flat over the last year.

Brazil’s neighbour Argentina, which saw its peso devalue by almost 26% against the dollar since January last year after it defaulted on a debt, has seen its stock market almost double.

The Argentinian stock market was at 5,283 points in January last year and is now at more than 10,000 points despite the peso being the most under-performing currency in South America.

Each of the countries above is having problems unique to their respective economies.

But the reading seems to be consistent – the weaker the currency against the dollar, the better it is for the stock market. Or, in the worst-case scenario, the stock market remains unaffected.

This is unlike the case in 1998 when a depreciating currency among Asian countries against the US dollar led to a collapse of the stock market. Malaysia was one of the worst affected when the market hit up to 260 points on Sept 2 when former Prime Minister Tun Dr Mahathir Mohamad imposed capital controls. The capital controls helped rein in the currency speculators, but did not dispel the reasons why the Asian countries came under attack.

The economic logic then was that the Asian countries had sustained their years of high economic growth via debts and a dependence on foreign direct investments (FDIs). Their current account was in negative territory for a few years and governments consistently recorded a deficit in their budgets.

The weak underlying economic fundamentals meant the currencies were over-valued and, hence, the attack from speculators. It started with Thailand and had a knock-on effect on other countries in the region.

The Hong Kong government that had its dollar pegged to the US dollar fought off the speculators, thanks to the heft of China’s huge reserves. The Russian rouble also came under attack, as did the Brazilian real.

The currencies only saw some stabilisation due to multiple efforts – including the entry of the International Monetary Fund and the fear that countries could also follow the Malaysian style of imposing currency controls.

But now, that economic logic does not seem to work.

Weak currencies do not mean that the macro-economic fundamentals are necessarily weak. Some countries have deliberately weakened their currencies to be competitive.

This is one reason put forward as to why a weak currency does not necessarily result in a weak stock market.

In fact, based on what the US is experiencing now, the pundits are saying that the strong US dollar is bad for improving the economy of that country.

This is the excuse that fund managers and the various intermediaries of the market are giving, as the Dow Jones struggles to cross the 18,000-mark convincingly.

The US dollar has appreciated against all major currencies, and now investors are saying that the strong currency has its drawbacks. Any business with an international angle to it in the US has had an impact.

Exporters, including farmers, are finding themselves less competitive, while imports are getting cheaper, which means inflation will remain muted.

A low inflation rate does not give an excuse for the Federal Reserve to raise rates.

US-based multinational companies are seeing lower value from the profits of the operations outside the country and this is impacting their earnings.

The stronger dollar has also had an impact on FDI in the US, say the technocrats.

The US generally has been the largest recipient of FDI, but its share of the total global FDI flows has dropped from about one-third in 2000 to less than a fifth in 2013, according to a report. Preliminary data revealed that the FDI flow into the US last year had dropped by almost 60% compared with 2013.

The optimists say the figure in 2013 is distorted because of single corporate transactions that had hiked up the FDI flow. They also say that as the US ties up more trade pacts the investment flows would improve because of the incentives.

A strong currency, which is an indication of a strong economy, is supposed to be good because it means higher income and more private-sector spending and investments. It translates into a buoyant domestic economy that, in turn, tends to attract more foreign flows.

However, that does not seem to be the economic logic for now.