On Tuesday, the Federal Reserve Board (Fed) kept its interbank overnight rates between zero to 0.25 per cent range. This rate had been in place since December 2008. It also pledged to keep these low interest rates for an “extended period” of time. In other words, Fed is continuing to use expansionary monetary policy to tackle the still fragile economy.
In a similar vein, Bank of Japan (BOJ) also kept its key interest rate at a super low 0.1 per cent. BOJ was to inject liquidity via cheap loans to the banks. The amount available for short-term lending programme will be doubled from 10 trillion yen to 20 trillion yen (S$308 billion). This loose monetary policy is to keep long term interest rates in the world’s second largest economy low with the sole aim of combating deflationary pressures in the Japan’s economy.
Both US and Japan are still facing slow economic growth and any increase in interest rates in both countries will kill the slowly recovering economies.
It is not unexpected for both central banks to keep to the low benchmark interest rates. The global investors were not caught off-guard as a result and in fact cheered that they can continue to buy equities globally using cheap funding from US and Japan. The Asian stock markets rallied yesterday including Singapore’s Straits Times Index (STI) which broke the 2,900 level since January 2010 to end at 2,919.3.
How much more can the STI move up? At the end of the day, the macroeconomic environment holds sway in deciding how far it can go. Certainly, cheap funds will move up the index. Conversely, increasing interest rate will depress the index. Investors must be able to discern which part of the stock prices is due to cheap funds and which part is due to the economic reality of the companies. This is of course the most difficult aspect of investing.
It will be wise also to consider the fundamentals of each listed company to decide on whether to put money into that particular counter. This way, investors need not be too affected by changes in the interest rates set by major economies.
Copyright © 2010, the author known as LKT in Singapore.
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