On the trail of "hot money"

Clients who heeded JNP’s advice to rebalance their portfolios mid-last-year are very likely now unwavering fans of the China market. For very sound – and increasingly validated – reasons, its fan base continues to grow. Our clients’ investments in Chinese assets will very likely keep on gaining traction for the foreseeable future with short term volatility.

Our investment mantra, nonetheless, remains diversification. Each geographical market possesses unique characteristics that, if strategically combined, can become a potent wealth accumulation vehicle for one’s assets. While China remains the preeminent asset destination, complementary markets (many of them undiscovered gems) abound as well.

Even though Asia continues to take the lion’s share of foreign direct investments (FDI), not all markets are created equal. “Hot money” – a factor that often determines the short-term vibrancy of a market – discriminates between economies for various reasons.

The term “hot money” refers to speculative funds that flow from one market to another precipitously, in order to make short-term profits. Because of their volatile behaviour, these funds are known as “hot money”. Serious investors can take advantage of such capricious trends, without falling into the trap of speculation themselves.

It may seem counter-intuitive, but experience has indicated that economies that are inefficient and lack complete transparency are the ones that present the most ideal conditions for hot money-linked arbitrage opportunities to be taken advantage of. China itself gives us the best example of this. Reports suggest that over half of all hot money (estimated at US$500 billion to US$1.75 trillion in 2008) entered China in the form of over-reported FDI figures, under-reported value of imports or over-reported value of exports, or even via underground money exchangers. This caused the Shanghai Stock Exchange to surge from 1,710 points in November 2008 to its recent high of 3,470 in July 2009.

Thus, if the desire is to take advantage of hot money-linked arbitrage opportunities, well-regulated economies such as Singapore and the East Asian markets would rank low. It would also be difficult to imagine ideal conditions in other emerging markets such as India and Indonesia, whose stock markets rallied substantially when pro-regulation governments were elected to power. The one country that appears most promising lies closest to home.

Since assuming power, Malaysia’s new prime minister, Najib Razak has reversed strict market regulations imposed by his predecessor, effectively rolling out a red carpet for FDI. With hot money leaking out of China since late last year because of the appreciation of the Dollar against the Renminbi, the newly-relaxed Malaysian market poses the most attractive pit-stop for those freed assets. Since Mr Razak’s election victory, the Bursa Malaysia has climbed a respectable thirty percent. It is highly plausible that Malaysia will be an increasingly alluring destination for hot money flows in the short-to-medium term.

Tracking hot money is a skill that requires a keen eye and an astute appreciation of market dynamics. Clients should consult their advisers if harnessing such opportunities is congenial to their risk appetite. Adroitly executed, such a strategy can prove extremely worthwhile, especially during recessionary times. Bear in mind however, that no one, not even the best investor in the world, can precisely predict future market behaviour based on past and current trends. In that light, know also that JNP Investment Committee spends considerable time studying the market to help increase the prospects in our clients’ favour.