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Saturday, January 30, 2010

Central Banks Slowly Starting To Raise The Interest Rates





The global economy crisis has led the central banks all over the world to reduce the interest rates to close to 0% which is the all time low. With interest rates that low, borrowing has been cheap which can indirectly spurs the economy - low interest rates, company can borrow to for company expansion, people can borrow more to buy properties and people are forced to spend their money or savings. In fact, the global stock market has been rallying non-stop since March 2009 because of low interest rates and this lead to the presumption that global economy has recovered, although the jobless in the United States stays at 10%. Some has the feeling that the stock market and commodities rally was led by low interest rate because people starting to treat stock market as just another legalized casino. Nevertheless, I do believe we are on the way of recovery but this road is expected to have a lot of potholes. With recovery on the way, central banks will be slowly starting to raise the interest rates.

But as the global economy is on the recovery and interest rates at all time low, no doubt interest rates have only one direction, up. In fact, China has already start tightening the lending policy and the US President, Barrack Obama has also voiced out to have stricter ruling and policy for the banks' activities in the United States. Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz also said on the January 29th that the interest rates were reduced to the current 2% to avoid a fundamental recession as the global crisis had led to an emergency condition and the interest rates will need normalization, in other word raising interest rates is inevitable. Central banks will be pressured to slowly starting to raise the interest rates with inflation starting to kick in.

Raising interest rates is definitely inevitable, to cool off the soon-to-be overheat stock market and commodity. Problem is, can the economy sustain its road to recovery if the interest rates raised? The world stock market has been undergoing correction from the first day Obama and China start voicing out on stricter ruling on the financial sectors. Imagine what will happen to KLSE if Bank Negara Malaysia decided to do the same? KLSE will definitely take a beating. People are thinking that a correction indicates that the economy is not on the way to recovery and on the way to another crash, but after a nine months non-stop rally, correction like this is in fact healthy. You cannot expect stock market to go one direction, even though in a very strong bull market. What goes up must comes down and vice versa.

For those who is still thinking whether we should continue to invest, I would definitely say yes, and if we are foreseeing the global economy recovery to be a long but painful one we should continue to invest, invest in undervalue stocks or dividend stocks but not over invest as even the best company in the world will suffer setback during this correction. If we realized one thing, it is during market correction that we can get very stocks at cheap price. Warren Buffett quoted before, "Price is what you pay, value is what you get". So if you think a stock worth more than 1 and the current price is 0.70, why not buy it? The question will remain which stocks are undervalued? How we know whether the stocks are undervalued?

2 comments:

  1. Jason, thanks for your hsaring...and this is really a good one...:D So, how you judge which stocks are undervalued? Mind to share... :)

    ReplyDelete
  2. I will share maybe in another post. Stay tune :)

    ReplyDelete