Nicholas Teo.Will the Tide return? Where is all this indiscriminate selling coming from?
Singapore's stock index, the FTSE STI has fallen 4% over the last week. During the past month, the FTSE STI has lost more than 10% in Sing-dollar terms. Worse still, on a USD basis, the local bourse has given up more than 12%.
At the risk of appearing in denial, the drop in the local STI is unusual for an index traditionally used in a flight to quality or safety. Given the months ahead aren't looking too promising, this acute pullback is notable, particularly in how quickly it has come about.
To be fair, Singapore's poor performance has tracked those of its regional neighbours. On a USD basis, Malaysia's KLCI is -15%, SET is down 9% and Taiwan off 14% on a one-month return basis. Even Hong Kong's HSI, sheltered from the USD strength, is off almost 10% this period.
What makes this sell down of Singapore and Asian markets slightly baffling, however, is the lack of panic that would characteristically accompany such meltdowns. Instead, the sell down in Asian markets this past months has been plagued by a consistent supply of stocks, offered and replenished in size on a daily basis (on the bid side of the buy/sell equation mostly). This is executed in an eerie, almost mechanical fashion.
When traditional fund managers sell, they usually just get out, quickly and in dramatic fashion. When funds are switching, they usually sell stocks or markets and buy others with the proceeds of the original sale. This time it seems like the tide is going out but refusing to come back in, even after its regular, daily cycle.
Just as strange, this selling does not feel like retail selling either, as index stocks are the ones primarily being knocked down.
We may be starting to see the effects and influences of indices and index tracker funds, especially from funds invested in the growing ETF space.
"Indices and the companies that calculate them have grown so powerful that they do not just track markets, but move them" according to a recent FT article.
A Bloomberg report in early August suggests that not only have ETF assets overtaken those of hedge funds on a global scale, but the annual turnover of ETFs is about 870% it's capitaliasation per year. This means that every dollar invested in ETFs was turned over 8.7 times last year. This 'velocity' - and the multiplier effect it creates - is incredible when compared to US stocks, which came in at a mere 200% last year.
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What does this all mean?
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