For Asia, threat of capital flight looms

Singapore

CAPITAL outflows from Singapore and the rest of Asia could spike up over the next six months following a bloodbath in regional currencies and equities that served to underscore the scarcity of safe havens in this part of the world, market watchers say.

Markets across the region were a scene of carnage on Wednesday after China's unexpected devaluation of the yuan sparked fears of a possible round of competitive easing and spurred concerns over the state of the world's second-largest economy.

The People's Bank of China (PBOC) on Wednesday set its daily reference rate for the yuan 1.6 per cent lower than the previous day, at 6.3306 to the US dollar. This followed a 1.9 per cent lowering on Tuesday - the biggest one-day fall in the yuan since 1994 - of what had been a stable rate for a considerable period of time.

On Wednesday, Singapore's benchmark Straits Times Index (STI) dived 2.9 per cent to 3,061.49 points - its steepest drop since October 2011 - in tandem with other major stock indices in Asia, which retreated between 0.6 per cent and 3.1 per cent on the heels of an overnight slide on Wall Street. The STI's 9 per cent slide so far this year has made it the developed world's worst performing stock index after Greece, according to Bloomberg.

The Singapore dollar also hit a five-year low against the greenback on Wednesday, weakening to as much as S$1.4155 amid the biggest two-day sell-off in Asian currencies since 1998. The yuan has suffered its worst rout since 1994.

The Monetary Authority of Singapore said in a statement that it "stands ready to curb excessive volatility in the trade-weighted Singapore dollar", though it added that it was sticking to its current monetary policy stance and that the Singapore dollar "remains within its policy band".

The turmoil in regional markets happened partly because investors were caught off-guard and panicked after China's dramatic move to change how the yuan is fixed against the US dollar (USD), analysts said.

They also warned that continued weakness in regional currencies and soft economic growth for the near term will drive up the risk of accelerated fund outflows from Asian capital markets into other regions such as the US and Europe, where prospects seem sunnier.

"Outflows from Asia as a region stand to rise, since the renminbi no longer appears the stronghold that many investors had thought. Regionally, the Hong Kong dollar and the Hang Seng may be the only alternative 'safe haven' at present, but are already expensive," said Pictet Wealth Management in a note on Wednesday, adding that the Singapore dollar appears "especially susceptible to further weakening".

Kelvin Tay, regional chief investment officer for Southern Asia Pacific at UBS Wealth Management, noted that most international funds are now cutting their equity allocation to Asia excluding Japan "as any further currency depreciation might negate any potential capital gains or dividend yields from Asian equities".

IG market analyst Nabil Mattar said over the phone that the yuan devaluation "couldn't have come at a worse time" for Asian economies that are already struggling with low growth due to the recent commodities slump. Besides equity markets here, regional bonds could also look less appealing, he said. "There will be a flight of capital, simply because investors will think that regional currencies, including the Singapore dollar, will depreciate in the next six months."

Andrew Wood, head of Asia risk research at BMI Research, said that though there have not been acute capital outflows from Singapore so far this year, the double whammy of a weakened Singapore dollar and STI decline could cause outflows to speed up in the near term.

Analysts said that funds flowing out of Asia are likely to be bound for the US, where the economy is recovering and an interest rate hike beckons. "The durability of the economic growth in the US is supporting the USD, perhaps more so than the potential for a rate hike," said Bryan Goh, chief investment officer of wealth manager Bordier, noting that a strong USD will "make USD assets more attractive and raise the hurdle for emerging market assets".

Europe was another potential draw due to its quantitative easing, analysts said.

However, Capital Economics senior Asia economist Daniel Martin said that he remained optimistic about China's economy and did not see a "big risk" of capital outflow from Asia. "China's economy is going to gradually slow, but . . . there have been a lot of policy efforts recently to stabilise it and they are starting to gain traction."

Phillip Futures analyst Daniel Ang thinks that the STI may fall below its psychologically significant threshold of 3,000 and the Singapore dollar could weaken to as much as S$1.50 per USD.

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