Sharpe Ratio Shows Rupiah Is Worst Carry Trade Bet: Asean CreditLilian Karunungan and Yumi Teso
Indonesia’s rupiah is delivering the developing world’s worst carry trade returns this month and Barclays Plc says volatility won’t end just because the U.S. Federal Reserve is maintaining stimulus.
The currency’s Sharpe ratio, which measures returns adjusted for price fluctuations, was 0.18, the least among 23 emerging markets tracked by Bloomberg. That compares with 13 for the Philippine peso and the Thai baht’s 12, placing them in the top 10. One-month implied volatility in the rupiah almost tripled to 17 percent this year, at least double the readings for Thailand and the Philippines.
The rupiah, Southeast Asia’s worst-performing currency this quarter, remains vulnerable to capital outflows because of its record current-account deficit and prospects the Fed will pare stimulus later this year, according to Barclays Plc. Amundi says the Philippines, Malaysia and Thailand are the first countries investors should look at because their economic fundamentals are better than Indonesia.
“In the near term, the delay on the tapering will support risk assets, with Indonesia also benefitting,” Prakriti Sofat, a Singapore-based economist at Barclays, said in an interview yesterday. “However, when the dust settles the uncertainty on when the Fed is finally going to start tapering will mean volatility will still remain in the markets.”
Measures of implied price swings in currencies fell across Asia yesterday after Fed Chairman Ben S. Bernanke kept the monthly bond-buying program at $85 billion. Economists surveyed by Bloomberg were predicting a cut of about $5 billion. A signal from Bernanke in May that the central bank was considering paring asset purchases triggered a selloff in emerging markets.
While the rupiah’s one-month volatility gauge dropped 1.71 percentage basis points this week, it’s still higher than the 5.75 percent at the end of last year. The baht measure fell 32 basis points during the five days to 7.68 percent, while the peso’s equivalent declined 69 to 6.03 percent. The Singapore dollar’s reading slid 85 to 5.6 percent, while the ringgit’s climbed 105 to 10.5 percent.
“As the Fed will still reduce stimulus, investors will have to be more selective in their asset allocations,” Tsutomu Soma, the manager of the fixed-income business unit at Rakuten Securities Inc. in Tokyo, said in an interview yesterday. “Indonesia especially, is not providing enough returns against the volatility, making it hard to attract inflows.”
The Sharpe ratio for the rupiah is the worst in the developing world this month ahead of 3.8 for the Romanian leu and 6.5 for the Czech koruna. In Southeast Asia, the peso and baht are giving the best return figures. The Singapore dollar is providing 7.8 and the ringgit 6.8.
The ratio, named after Nobel laureate and Stanford University professor William Sharpe, is a measure of the excess return per unit of risk in holding a currency position. This is used to determine how well an investor is compensated, with a higher ratio translating to more of a reward.
Southeast Asia’s most-active currencies rallied yesterday, led by the ringgit’s 2.7 percent advance and the rupiah’s 1.7 percent gain. The peso climbed 1.1 percent, the baht rose 2.2 percent and Singapore’s dollar was little changed.
The risk from the Fed averting stimulus paring is that policy makers in current-account deficit countries such as Indonesia may become more complacent about undertaking further reforms and interest-rate increases to improve their financial positions, according to Barclays.
HSBC Holdings Plc is starting to favor the rupiah after being cautious toward the currency for almost two years. President Susilo Bambang Yudhoyono increased subsidized fuel prices in June for the first time since 2008 to help narrow the current-account deficit, while the central bank raised its benchmark reference rate by a total of 150 basis points, or 1.5 percentage points, since June this year to 7.25 percent.
“If foreign-exchange liquidity improves for the rupiah, then we would feel more confident that the currency is moving onto a better footing given recent monetary tightening and firm policy action to reform fuel prices,” HSBC analysts led by Hong Kong-based Paul Mackel wrote in a report yesterday.
Indonesia reported a shortfall in its broadest measure of trade of $9.8 billion in the second quarter, the largest in data compiled by Bloomberg going back to 1989. Malaysia’s surplus shrank to 2.6 billion ringgit ($826 million), the closest the country’s come to a deficit since at least 1999. Thailand posted its fourth monthly deficit in June at $709 million.
The Philippines still enjoys a surplus. The balance in the broadest measure of trade climbed to $2.5 billion last quarter from $2.3 billion in the same period a year earlier, Bangko Sentral ng Pilipinas Director Rosabel Guerrero said in a media briefing in Manila today.
The Fed’s decision has given a much more positive tone to “risky” assets, Philippe Jauer, chief investment officer for global fixed income and currencies in Singapore at Amundi, which oversees about $1 trillion, said in an e-mail interview yesterday.
Investors should look beyond the current accounts of Southeast Asian nations and focus more on international investment that would support further economic growth, Ken Hirose, a fixed-income portfolio manager in Singapore at Nikko Asset Management Ltd., which oversees $156 billion, said in a Sept. 17 interview.
Singapore and Malaysia have some of the highest ratios of foreign direct investment to gross domestic product in the region at 20.6 percent and 4.2 percent, according to the latest available data from the World Bank. In Thailand, the proportion is 2.4 percent, Vietnam is 6 percent, the Philippines 1.1 percent and Indonesia 2.3 percent.
“The current-account deficit tends to be more cyclical,” Hirose said. “FDIs into these key nations are likely to be more sustainable and grow further from here, which is a sticky money inflow. Thailand and Malaysia are in a better situation in that sense. The Philippines is still behind the curve.”
The cost to protect Indonesia’s bonds from non-payment using five-year credit-default swaps dropped 35 basis points to 208 in the last two days and is up two basis points this quarter, CMA prices show. In Thailand, it fell 18 to 106 and dropped 14 from June 30. Malaysia’s rate declined 21 to 100, compared with 120 at the end of last quarter, and in the Philippines it slipped 16 to 102.
“Forex volatility discouraged foreign investors from adding to positions in some Southeast Asian countries,” Takahide Irimura, Tokyo-based head of emerging-market research at Kokusai Asset Management Co., Japan’s biggest mutual fund managing $38 billion, said in an interview yesterday. “Attention has been paid to current-account balances of each nation and those who suffer from a widening deficit or whose surplus has been shrinking saw sharper sell-offs.”
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