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Trade Alert: What the Rate Hike Means for Us

Well, they did it. The arbiters of U.S. interest rates — the Federal Reserve — decided now is as good a time as any to raise rates for the first time in nearly a decade. Stocks around the world have rallied, what I see as a “sigh of relief” rally. Now the first rate hike isn’t constantly hanging over our heads.

Personally, I didn’t think it would happen. Aside from the whining economists and strategists, there is no compelling economic reason to push interest rates higher. The U.S. economy is showing signs of weakness.

Corporate-profit growth is in decline and has fallen by the most since the global financial crisis. That’s in large part a function of U.S. dollar strength that has made American goods less competitive overseas, so our exporters here at home are suffering. And an interest-rate hike only exacerbates the strong-dollar trend, so we can expect additional corporate-profit weakness.

Manufacturing is in a deep recession. And Fed Chair Yellen’s comments about the strong jobs market are a bureaucratic smoke screen. I’ve pulled the data apart by industry, and I know that America is largely building a barbell jobs market — a decent number of high-wage jobs, an excessive amount of low-wage jobs in the service sector and very few middle-class jobs, essentially creating a barbell structure — heavy on two ends, light in the middle. (And the real unemployment rate, including people who have given up looking for a decent job, remains worryingly elevated.)

I see a recession on the horizon. And I think the Fed sees it, too — which is why the Fed hedged, acknowledging that global pressures could influence its choices going forward. The Fed governors (and I think this is the case) might have wanted to raise rates to give them at least one interest-rate cut to play with before pursuing new, unconventional strategies, possibly including negative interest rates.

But for now, we have a rate hike and the knock-on effects…

Asian currencies weakened. And so long as the Fed maintains this posture that additional rate hikes are coming, Asian currencies will continue to weaken — though that won’t apply to the Hong Kong dollar, since it is pegged to the greenback. The problem here isn’t so much the weak currencies themselves but the fact that so many Southeast Asian companies and countries have accumulated dollar-denominated debts — and as U.S. dollar rates rise and local currencies weaken, dollar debts hurt doubly bad.

The euro will continue to weaken, too, but in Europe the debts are mainly in the euro. So a stronger dollar doesn’t hurt. It actually helps. As the euro weakens, European exports grow increasingly competitive against U.S. competitors.

So, for that reason, we are going to scale back our exposure to Southeast Asia, and begin increasing our exposure to Western Europe. We will maintain exposure to Hong Kong since there is no currency risk.

That means we’re exiting a large number of companies today — some are winners, some are losers.

Actions to take:

  • Sell Neptune Orient Lines (Singapore: NOL) at the market. It closed overnight at S$1.24 (US$0.87). That gives us a 13% loss, all in.
  • Sell Parkway Life Real Estate Investment Trust (Singapore: PREIT) at the market. It closed overnight at S$2.27 (US$1.60). That gives us a 21.7% gain, all in.
  • Sell PTT Global Chemical (Thailand: PTTGC) at the market. It closed overnight at 51.50 Thai baht (US$1.42). That gives us a 34% loss, all in.
  • Sell Krung Thai Bank (Thailand: KTB) at the market. It closed overnight at 16.60 Thai baht (US$0.46). That gives us an all-in gain of a bit less than 1%.
  • Sell PT Tiga Pilar Sejahtera (Indonesia: AISA) at the market. It closed overnight at 1,365 rupiah (US$0.10). That gives us a loss of 53%, all in.
  • Sell Astra International (Indonesia: ASII) at the market. It closed overnight at 6,400 rupiah (US$0.46). That gives us a 30% loss, all in.
  • Sell Sheng Siong Group (Singapore: SSG) at the market. It closed overnight at S$0.835 (US$0.59). That gives us a 13% gain, all in.

With those sales, we are maintaining just three positions in Southeast Asia: Bangkok Dusit Medical Services (Thailand: BDMS, hold), which runs a chain of hospitals in Thailand (we’re up 35%); CP ALL (Thailand: CPALL, buy up to 52 Thai baht), a Thai supermarket chain (we’re down 13%); and IHH Healthcare (Malaysia: IHH, hold) in Malaysia, which also runs a string of hospitals in Malaysia and elsewhere (we’re up 71%). Medical services do not go out of style regardless of economies, and people do not stop shopping for food. These companies are in good positions.

Going forward, we will begin concentrating a bit more on Europe, and we will maintain focus on Hong Kong — it is a cheap market.

And as it becomes clearer in 2016 where the U.S. economy is really going, and how the Fed responds to the even stronger dollar its action has created, we will adjust accordingly in Asia.

Until next time, keep a global view…

Jeff D. Opdyke
Editor, Profit Seeker