THe Effect of Interest Rate

As an investor, very often we run into a situation whereby we do not fully understand certain economic concepts or economic indicators while reading the Business Section of the newspaper. These economic indicators are important source of information that provides investors with insight into the environment in which financial markets operate that may in turn have a significant impact on our stock market.

For example, I read an article this morning, it said: “EU raised interest rate to boost the Euro”. Many investors only know the relationship between interest rate and stock market, but they do not know why interest rate will affect a country’s currency?

While interest rate has an inverse relationship with the stock market; it has a direct relationship with the currency! This is because when a country raises its interest rate, it will attract short term “hot money” or short term capital into the country to take advantage of the higher interest rate. When this happens, it raises the demand for the currency and thus raises its valuation as well.

During the 2006 – 2008 oil crisis, our official inflation once reached more than 5% but unofficial inflation could be much higher, it was not reflected mainly due to the oil subsidies that we were enjoying. Our inflation problem was much better when we compared to other neighbouring countries since they do not have oil subsidies.

So back to the point, to combat high inflation most countries would raise their interest rates to prevent erosion of purchasing power. The effect? If the economy already in recession due to high inflation, it will go deeper into recession further as the cost of borrowing has increased!

Our Bank Negara at that time did raise interest rate but to a lesser extent. It was a brilliant move by Dr. Zeti, our award winning Governor, that we sacrificed the purchasing power temporary, kept the cost of borrowing at reasonable level to protect the business sectors, so that we can all secure our jobs. In addition, the higher interest rate made our currency stronger, so that we can import cheaper to bring down the imported inflation. As for our exports, not a big problem there because the regional countries all experienced currency appreciation so we did not lose our competitive advantage.

Hence, do not underestimate the effect of the interest rate, it can bring impact onto our daily consumption, firms investment, government borrowing, our Ringgit as well as our Malaysia trade patterns.

Besides our local interest rates, we must also know the level of interest rates in other countries as well. So keep reading! The more you read the better investor you are and you are on your way to successful investing!


If you like my articles, please click “like” at my facebook at http://www.facebook.com/pages/Investment-Talk/169548849740474

Happy investing,
Pauline Yong

Consumer Confidence Index

http://www.youtube.com/watch?v=dQlfj5IMVfY

The Black Swan Theory

Recently, there are a few "unimaginable" events one after another unfolding before our eyes. The 2008-2009 global financial crisis, the recent Middle East wars and the Japanese “Black Swan” 9.0 earthquake. I call these events “unimaginable” not so much because they are illogical but rather because they fall outside the normal range of experience and prediction. The surprise, in other words, arises from a failure of human imagination.


The Black Swan Theory was developed by Nassim Nichalas Taleb in 2007 where he described many historical events as black swans, be it scientific new discoveries, wars, financial crisis or natural disasters as black swan events. Examples of such events are: World War 1, internet development, 911 World Trade Centre terrorist attack, the subprime financial crisis and so on.

According to Wikipedia, “ the Theory of Black Swan Events is a metaphor that encapsulates the concept that the event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.”


Japan's recent disaster fits this pattern. In hindsight there was only a single "black swan" anomaly: the 9.0 earthquake. That such an event, once it had happened, would trigger an enormous tsunami was surely predictable, as was the impact on nuclear facilities that were designed to withstand only more limited shocks and the sickening human and social devastation that would ensue. The political, economic, and strategic implications of the continuing disaster are likewise more foreseeable than was the disaster itself.


No matter what it is, there is certainly an impact on our Bursa Malaysia. I was expecting the KLCI to fall more but it didn’t. This makes me realise that our bursa has more value investors than I thought which is good news for us. That means if I continue to promote value investing, we’ll have less shocks to our stock market, which is why people are saying our Bursa Malaysia is a low beta stock market.


If you like my articles, please click “like” at my facebook at

http://www.facebook.com/pages/Investment-Talk/169548849740474

Happy investing,
Pauline Yong

Let It Fall, Let It Fall, Let It Fall!

Last Friday Japan Earthquake was an unexpected event, and this will definitely cause panic selling on the next trading day which is on Monday. Usually for an unexpected event like this our Bursa Malaysia will undergo a period of correction. I'll usually wait for three weeks before I'll go into the market for bargain hunting. Always remember, the stock market will undergo a cycle but on the long run, it will be on an uptrend. So my advice is stay calm, let the market fall for 2-3 weeks, before you go in again. Unless there is another unexpected event happen, things will be different. But for now, that should be my strategy!

Happy investing

Pauline Yong

Oil Price

Everyone is talking about the oil price as this is the crucial factor that determine the direction of the stock market now. So I asked a group of audience recently at what price they think the oil price will create a panic selling for stock investors. I told them to think carefully before giving the answer as this is a good way to train their “psychic power” in predicting the direction of the market. Many say around US$100 – US$140 should create havoc selling.

I asked them again: “So you think when the oil price is near the historical high of US$147, investors will get panic and cause the stock market crash?”

In fact, in my personal view, the oil price should reach US$200 and beyond before investors get jittered. Then the audience grasp in disbelieve – too high!

Let me explained further, according to the behavioural finance this phenomenon is known as the “anchoring effect” whereby people usually refer to one reference point and make judgment from there.

When the oil price is near historical high level, the market participants may not feel the shock because they have seen this price level before and it’s within their expectation. What usually cause a stock market crash is that things happened in an unexpected way, which is beyond people’s expectation!

So to me, the oil price must be significantly higher than the previous high level, in order to stir some emotional reactions from the market participants.

Moreover, whether the oil price will go higher largely depends on the development in the Middle East war. If we think the war will end in the near term, then the market will be bullish. However, if this event progress like the wild fire causing widespread of upheavals, then I think we should start to take profits now.

For now, my strategy is short term play. And remember to take some profit along the way because we want to minimize our risk exposure in an uncertain market.


Happy investing,
Pauline Yong

Investment Talk Campus Tour

Hi,

I'll be organising Investment Talk Campus Tour with CIMB in March 2011. The details are as follows:

Date: 8th March 2011 (Tue)
Venue: HELP Institute University College
Time: 10:30am - 12:30pm

Date: 8th March 2011 (Tue)
Venue: Sunway University College
Time: 3:30pm - 5:00pm

See you guys there!

Happy investing,
Pauline Yong