|Tan Teck Leng explains why Asian currencies are likely to benefit,
strengthen and see further upside potential in the long haul.
In today’s environment, swings in currency values rank as one of the issues that matters most to international investors. Changes in the exchange rates between an investor’s home currency and the currencies of the assets they purchase could have a considerable impact on overall returns.
For example, an investment in the Indian stock market index would have returned some 20% from January 2007 to date, but the Indian rupee has lost about 22% of its value against the US dollar during this period. Meanwhile, an investment in Singapore’s Straits Times Index would have benefited from a 20% gain of the Singapore dollar against the greenback.
Several factors contribute to a currency’s long-term stability. One is a positive balance of payments, the broadest measure of fund flows for an economy. Ideally, a country should have a current-account surplus so that it can cushion potential shortfalls in its capital account. Another factor is the domestic inflation rate, which needs to be maintained at a moderate level to keep local prices stable while preserving the value of the currency.
Standing the test of time
In this regard, among the Asian currencies, the Chinese renminbi and the Singapore dollar offer the best outlook for long-term stability. Since 2007, the two currencies have appreciated significantly against the US dollar—23% in the case of the renminbi—compared with the 4.5% average gain for their Asian peers. We think further appreciation appears likely for both currencies.
Rise of the renminbi
During recent periods of risk aversion, the renminbi did particularly well against the currencies of the G-10 countries and Asian economies alike. The strength of the renminbi is underlined by three factors:
Singapore dollars: Gradual appreciation
The Singapore dollar benefits not only from the country’s current-account surplus, which is the highest in Asia, but also from the currency’s unique role as a monetary-policy tool. Given that Singapore is highly export-oriented, the Monetary Authority of Singapore (MAS) steers policy mainly through the exchange rate of the Singapore dollar, balancing economic growth and inflation. As the Singaporean economy has avoided a major slowdown and inflationary pressures are high, the MAS is very likely to maintain its push for a gradual appreciation of the Singapore dollar against a trade-weighted basket of currencies.
The stability we foresee for these two currencies makes them ideal components of a diversified portfolio. Singapore has an open capital-market that offers a wide variety of Singapore-dollar-denominated assets. While in Hong Kong, there is a fast-growing market for renminbi-denominated assets in Hong Kong, where investors can gain renminbi exposure through bonds and deposits.