The long-awaited revaluation of the Chinese yuan in July provoked quite a stir across the markets, as investors frantically chased profits. Foreign exchange markets predictably flurried and volumes traded by customers on the EBS Spot System surged to a record level following the move. Counterparties transacted more than 107,299 deals during the day of the devaluation, July 21, with an average deal completion time of less than 400 milliseconds and an average number of 400 quotes in the market.
Given the modest 2% revaluation, many investors have given up on betting how to make money on the next move, as no-one can be certain when the People’s Bank of Bank of China will act again and, if it does, by how much.
Such nebulous information is a good reason why investors should drag themselves away from the addictive lure of speculating on China and investigate other investment strategies.
So far it appears that equities are the place to go.
Investor interest in Asia equity funds rocketed at the beginning of August, with the Asia ex-Japan funds tracked weekly by Emerging Portfolio Fund Research taking in a net $370.08 million of new money for their third best weekly inflow total this year.
“While nobody other than maybe a handful of people in Beijing know whether the 2% revaluation of the Chinese yuan will be followed by more significant revaluations, it’s clear that this and Malaysia’s move is introducing some new money flows into Asian equity markets,” says Brad Durham, managing director at EPFR. “The hope among many investors is that stronger Asian currencies will stimulate domestic demand, regional trade, corporate earnings growth and even yield some currency gains in the process.”
Jes Black, a hedge fund manager at Black Flag Capital Partners, sees the revaluation as just a token move and considers that investors should really be looking at the bigger picture. “It’s a red herring to keep looking at what China’s doing,” he says. “We’ve seen a huge breakout in the Korean stock exchange for example. In the past, psychological misgivings have capped it but it’s now rallying above the 1,000 level.”
So while the Bank of China continues to tease the market, as long as currencies of the peripheral countries continue to strengthen alongside rising stock markets, investors should be in for a good run.
