The rising affluence of Malaysians and the ringgit’s gyrations have forced people to look into ways to hedge against the US dollar A RETIREE who loves to travel posed this question during a property launch of a project in London recently that struck a chord. It was just after the Employees Provident Fund had declared a 6.75% dividend to contributors for 2014. It was the best-ever performance since 1999, but to the pensioner, he actually felt poorer. “What is the point of a 6.75% return when the ringgit has depreciated from RM3.10 against the US dollar to almost RM3.70? It is a decline of almost 20%,” he posed. Over the past seven months, the ringgit has moved from as high as RM2.99 per dollar to a low of RM3.70 per dollar. The weakening ringgit against the US dollar has, no doubt, rattled investors, especially those with the need for foreign currencies. Whether it’s a parent looking to fund his or her child’s education overseas, or to pay off the mortgage for a property, the movements in the ringgit have put many on the spot. The ringgit’s steep decline against the greenback started last September, shedding 10.8% to end at 3.495 against the US dollar as at end-2014. The fall in commodity prices didn’t help either – which also contributed to the ringgit hitting a six-year low of 3.7350 against the dollar on March 20. Uncertain times for local currency Until mid-2005, the ringgit was pegged at RM3.80 against the US dollar. Only after the US Federal Reserve launched the first round of quantitative easing at the beginning of the global financial crisis in 2008 did the ringgit start to depreciate. The gyrations bring back memories of the 1997/98 Asian Financial Crisis, where many were caught – be it parents or investors – off guard. At that time, the ringgit against the sterling was almost at RM7. Against the US dollar, it went from RM2.50 to more than RM4 within a year from July 1997. Prior to 1998, when the ringgit was still an international legal tender, Malaysians could easily hedge the exposure. However, after Sept 2, 1998, when capital controls were imposed, the movement of the ringgit was restricted. Only some time in 2007 after Bank Negara relaxed the restrictions that local banks started offering some hedging mechanisms. However, actual hedging was not really required until the last one year.

Thanks to rising affluence, today, more are purchasing property or educating their children overseas. According to HSBC’s “The Value of Education” survey for 2014, Australia is the most expensive destination for overseas students. The average international student, reports the bank, would need US$42,000 (RM151,000) a year to cover both tuition fees and the cost of living in Australia. Following Australia in the cost table are Singapore (US$18,937), the United States (US$24,914), the United Kingdom (US$21,365) and Hong Kong (US$13,444). Taking these factors into account, it’s not surprising to see investors looking for safer, alternative investments that can help them hedge against the volatility of the ringgit. Below are four – or rather five – options for the normal and high-net-worth individuals to ponder over. Property Investing in property overseas is seen as one way to hedge against the ringgit’s volatility. Knight Frank Malaysia managing director Sarkunan Subramaniam says it would not be surprising to see more individuals investing in properties overseas looking to hedge against the weakening ringgit. “One way to hedge against a weaker ringgit before it falls is to buy properties in countries where the currency is more stable against the US dollar.” When it comes to property, Sarkunan says most investors’ preferred investment destinations are usually the US, the UK and Australia. “It’s an indirect way of hedging.” Sarkunan says there is no financial criteria when investing in property overseas. “As long as you have the money, you can.” However, he adds that investing in properties overseas does have its risks. “At the end of the day, you’re still exposed to a currency, so you can go wrong too.”

OCBC Bank (M) Bhd vice-president for research wealth management, Michael Lai, says investment in a property overseas helps to diversify an investor’s assets from a ringgit base to the foreign currency base of the property in question. “For example, a Singapore property investment would mean the investor has diversified into the Singapore dollar. Diversification reduces the volatility inherent in holding one’s wealth in a single currency.” He says investors who qualify as high net-worth individuals are free to make investments in foreign assets under Bank Negara’s guidelines. A developer says that the best foreign property bets are in countries that have depreciated the most against the US dollar because of uncertainties in the domestic scenario. “This is because it stands to gain the most if the uncertainties clear up. A 5% appreciation against the dollar and another 20% appreciation in the property price over two years will be a good return,” says the developer.

On the local front, Agency of PPC International Sdn Bhd CEO Siva Shanker believes that the local property market is a safe sector for investors to park their money in. “It is arguably the best hedge against inflation. The appreciation of property prices outweighs inflation,” he says. Siva: ‘The appreciation of property prices outweighs inflation’. “Today, property prices are so high. However, rentals have not caught up, so returns are not as high – maybe between 3% and 4%. On top of that, you still have borrowings to take care of.” Siva notes that investors within the property sector can achieve double-digit capital appreciation growth annually over the longer term. “Generally, capital appreciation within the property sector can range between 5% and 15% per year. In a good year, it could go up to between 20% and 25%. In a bad year, maybe just 5%. “However, it still goes up, no matter what.” He says that the level of property transactions has been dropping since 2012. “In 2013, it dropped by around 10.9%. I am projecting that it was probably flat last year. Since 2012, prices have never gone down but transactions have. “Yes, there may be corrections, but in totality, it goes up. It’s still better than putting money in the bank.” Dual currency deposits Local banks have started to offer dual currency deposits in a big way, especially now with the weakening of the ringgit.

According to Citibank Bhd retail banking head Rakesh Kaul, these are structured investment products that are linked to a foreign exchange option, whereby investors have the flexibility to choose their preferred currency pairs, as well as tenures that suit their needs and goals. “Available tenures range between one week, two weeks and one month,” he says, adding that Citibank offers dual currency deposit contracts in nine currencies. “Before investing, an investor will have to agree on the strike price for the currency pairs and tenure selected. The strike price is the pre-determined exchange rate which an investor has selected at the point of subscription. “The prevailing exchange rate upon expiry of the contract is compared to the strike price and determines whether the final payout will be paid in the base currency or alternate currency,” says Rakesh. He adds that dual currency deposits are suitable for those who need diversification to foreign currencies and are indifferent to holding the currencies selected. “Investors who are willing to and are able to take foreign exchange conversion risks would look into dual currency deposits as an investment tool, as it allows an investor to potentially earn a higher interest rate compared to a conventional time deposit. “Alternatively, an investor who may just want to do a currency exchange at the pre-determined strike price would look into dual currency deposits as well.”

According to data by Bank Negara, foreign currency deposits by individuals in the banking system surged more than 400% to RM12.68bil as at end-2014 from RM2.46bil in 2007. Success Concepts CEO and licensed financial planner Joyce Chuah cautions that dual currency deposits are suitable for those who fully understand how the concept works - and prefer higher returns by trading rather than investing into global stocks or funds. “Understand carefully in what situations your dual currency account might not yield you any returns. Also, take the time to understand the risks involved.” Some do not even recommend investing in dual currency accounts to hedge againt the ringgit volatility. MyFP Services Sdn Bhd managing director Robert Foo is one of them and feels it is the wrong thing to do. “Here, you’re relying on another currency that could just as well appreciate at any time. How would you know if that (foreign) currency is going up?” One thing is for sure. The dual currency deposits are more useful for people who need foreign currency for whatever reasons such as to pay the tuition fees for their children abroad or instalments for a property. It is not meant for speculating because the investors should be prepared to hold on to the foreign currency.

Offshore investing Foo believes that a wiser, better option would be to look into a diversified portfolio of investments overseas. “This could be in funds, bank accounts, property, exchange traded funds or stocks.” “Diversify your currency exposure in other asset classes where the currency is different. What you invest in will depend on your financial needs, goals and risk appetite.” Unlike dual currency deposits, which focus on a single currency, Foo feels that one should invest in an instrument that invests in multiple currencies. “It’s like placing your money in a local fund that invests in a number of stocks. Here, you invest in several foreign currencies.” Here, a potential investor has the choice of either placing their money with a wealth manager or in foreign stocks and bonds. Chuah says investing in global stocks and bonds is suitable for those who have the skill and time to manage (the stocks and bonds) and can “take the vagaries” that come with these investments. “It’s a good hedge because they provide capital returns (unlike low deposit interests) as well as foreign exchange returns, assuming the currency in question appreciates against the home country’s currency.” A wealth manager comes in when a person doesn’t have the requisite expertise to manage the investments. Such is the case for global funds, says Chuah. “These are suitable for those who have no time or skill to manage investments into direct global stocks. It provides a diversification into a basket of currencies via their stock investments, which are usually spread across various countries.

” An industry observer notes that Singapore is a preferred investment destination for many investors because there are banks there that offer investments in a wide range of assets. “For instance, an investor has the option of buying into bonds of emerging markets as well as developed economies. It can be in US dollars, the euro or any other currencies. The options are wide,” says the investor. Foo concurs, pointing out that Malaysia is still a closed market when it comes to investment options. “There are certain funds that are not allowed to come in,” he says. Another industry observer notes that upfront fees for investing in unit trusts in Malaysia are also higher compared with other countries such as Singapore or even Thailand. According to reports, upfront unit trust fees in Malaysia can go up to 6%, while that in Singapore can go up to 5%. Thailand, meanwhile, has lower upfront fees of up to 2%. Foo says that offshore investing is generally catered to high-net-worth individuals. “It’s ideal for those who can spend and invest more, if you want to get better returns,” he says. And like any type of investment, placing your money overseas will have its downsides too, Foo adds. “At the end of the day, it depends on the individual’s risk appetite.” Stocks that benefit from the ringgit volatility Another way to mitigate the ringgit volatility is to invest in stocks that can benefit from a higher US dollar, or even low commodity prices. “These would include companies whose exports have high local ringgit-denominated content and robust external demand,” says an analyst from a local bank-backed brokerage. He says the rubber, semiconductor and technology, as well as timber-based sectors, are more resilient in times when the ringgit is weak. He cited the World Semiconductor Trade Statistics, which revealed that global semiconductor sales are expected to remain stable. Based on the latest forecast, sales are expected to reach 3.4% and 3.1% for 2015 and 2016, respectively, from an estimated 9% growth for 2014, he says. “The good growth is mainly due to higher demand from the automotive and telecommunications sectors,” he says.

Another analyst concurs that rubber product manufacturers such as Top Glove Corp Bhd, Supermax Corp Bhd and even condom manufacturer Karex Bhd are beneficiaries of the weaker ringgit. “In the rubber glove segment, this is generally because their US dollar-denominated income will translate into better earnings once it’s converted into the ringgit.” Other segments are industries such as furniture producers such as Latitude Tree Holdings Bhd and poultry producers that have gained from the currency volatility. The furniture makers gain because their sales are in US dollars, while the poultry players benefit from cheaper raw materials due to the depressed prices of feed stock such as corn that have come down due to the stronger dollar. Fifth option The fifth option for those without any urgent need to diversify their ringgit holdings but requiring small amounts of foreign currency from time to time for probably their holiday travels, the safest option would be to physically hold the foreign currency of their choice and purchase them whenever the currency depreciates. However, this is less practical and safety is an issue. “It’s easy to purchase the currency of their choice. But not so practical as storing them safely can be an issue. Plus if one is not buying in large quantities, then the cost of acquiring them can be a downside factor.” “If you intend to buy and sell the physical currency for currency gains, do be mindful of the spread (transaction costs) involved by exchanging them at the foreign exchange.”