When making your investment decision, do you lean towards growth funds or value funds? Let’s take a look at both to see which type suits you best! While both growth and value investing styles seek to provide the best possible returns for investors, the primary differences lie in the approach, the way stocks are picked, and the types of markets for which they are best suited.

Growth investing

A growth fund tends to focus on companies that experience faster than average growth as measured by revenue, earnings, or cash flow. Generally, growth-oriented companies are also more likely to reinvest profits in expansion projects or acquisitions, rather than use them to pay out dividends.

Investors focused on growth investing will keep an eye out for stocks with growth potential that focus on newer and expanding companies which are likely to rake in profits in the future, and higher than the industry or the market in general. When you invest for growth, you are looking at capital appreciation over the long term.

As growth funds are expected to offer higher returns, they also generally represent a greater risk. They tend to do better than the overall market when stock prices are rising, while underperforming the market as stock prices fall. Therefore, investing in growth funds may require a higher tolerance for risk and a longer time horizon.

Factors to consider when considering  a growth fund:

  • Is the company able to grow substantially faster than its competitors?
  • Is the company involved in a rapidly expanding industry (e.g. technology and healthcare, etc.)?
  • Are you comfortable with profits being realised through capital gains instead of dividends?
  • Can the fund achieve above average valuations such as high price-to-book and/or price-to-earnings ratios?

Pros and cons of growth investing

Pros Cons
Able to realise substantial returns in a shorter time span Market downturns tend to significantly affect growth stocks significantly
Would potentially generate a good income stream if the growth stocks’ dividends grow in tandem with rapidly rising earnings High expectations of companies’ prospects increase the probability of disappointment if the company does not meet investors’ expectations
The absence of a large margin of safety increases the probability of losses

Value investing

The goal of a value fund is to find the ultimate bargain. For example, stocks that have low prices in relation to factors such as earning, sales and net current assets of the company. A value investor will seek to buy stocks that are temporarily out of favour or at a bargain price. The value investor does so because he predicts that the share price will eventually return to a higher level when the stock comes back into favour, and the market will then drive the stock prices back up. Value investors usually do not follow the crowd, preferring instead to focus on a company’s fundamentals and take advantage of the market’s overreaction to negative sentiment.

There are various reasons why stocks become undervalued in the market. Sometimes, a company or industry could be going through hard times due to a fluctuating or a poor quarterly earnings report, negatively affecting its stock price for the short term. In this case, the value investor will look for a “margin of safety”, meaning that the market has discounted a security more than its market value, for example trading at a price less than its intrinsic value. Buying at a good bargain ensures that if the investment value drops, the losses will be minimal.

In general, a value fund will invest in mature companies that use their earnings to pay dividends. As a result, value funds tend to produce more current income than growth funds, although they also offer the potential for long-term appreciation if the market recognises the true value of the stocks in which they invest.

Factors to consider when considering investing in a value company include:

  • Does the company’s business make long-term sense (e.g. financial services and utilities)?
  • Can the company’s stock be bought at a discounted rate?
  • Does it have a low price-to-book and/or price-to-earnings ratio?
  • Does it have a high dividend yield?

Pros and cons of value investing

Pros Cons
Reduces probability of a large loss by purchasing equities with a high margin of safety If a downtrend occurs, the shares may continue to become cheaper and cheaper (trading at less than intrinsic value)
Goes against the grain i.e. not following the crowd, where “hot tips” and fads do not impair investors’ judgement Intrinsic value is subjective, two analysts can analyse the same company and derive at a different value
May provide consistent returns May yield lower returns on an annualised basis

The best of both worlds

So, which style of investing would suit your portfolio best? Well, the experts say that every investor’s portfolio should contain a combination of both.

As investors, employing a single approach only when investing over a long period of time may not be the best idea. Instead of choosing only one approach, an investor should strive to maximise returns while minimising risk by combining both growth and value investing.

This approach would allow investors to potentially gain whether the general market situations favour the growth or value investment style. These two types of stocks also tend to move in the opposite direction to a certain extent, so investors can enhance their potential for returns and reduce risk by combining the two approaches. Value funds offer investors more protection during sell-offs, while growth funds tend to lead during market rallies.

The wise investor knows and understands the differences between the two, but the wisest investor knows that a portfolio built around both growth and value stocks is the true path to investing success.

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3 Money Mistakes That Could Cost You Millions

The great investor, Warren Buffet said, “Risk comes from not knowing what you’re doing.” And this seems to be the number one reason why the many Malaysians are unable to climb up the social ladder.

Our research reveals that the average Malaysian lose about 1.5 million during their lifetime. This staggering loss can be traced back to the bad money decisions and unnecessary mistakes made by the majority of Malaysians with their hard-earned money.

These are some of the common reasons why your income just never seems to be enough:

The truth is, the seeds of this financial disaster are planted years before their outcome. People have the tendency to make unnecessary mistakes (either taking too much risk or doing nothing to grow their wealth) which derail them from their rightful financial destiny. The mistakes often seem small and negligible, and may not even look like mistakes at the time. Hence, many do not even realise that they’re making mistakes and would erroneously continue down this path.

Here are three of the most common mistakes being made by the average Malaysians:

Mistake #1: Not optimising the returns on savings

Malaysians love fixed deposits. Most of us will use these as our de facto ‘investment’ tool but is it the right way to think? Putting RM1,000 every month (RM240,000 total investment) in a fixed deposit (FD) account for 20 years, at an average of 3% interest per annum, will net you a total return of RM329,122.75.

However, if you had invested the same amount at an average rate of return of 8% (which is realistically obtainable through various investment options like unit trustsshare trading or even with ASB) per annum, you would get RM592,947.22.

In retrospect, keeping the money in FD would have caused you to lose RM263,824.47.The outcome is even worse for those who leave their money to languish in a savings account, which only sees a 1% to 2% per annum.

Mistake #2: Paying too much on insurance premiums

It’s undeniable, life insurance protection is important, especially when you have financial dependents.

Consider these two life insurance products for a 35-year-old: term insurance for RM500,000 will cost RM1,625 per annum, whereas a whole life policy will cost RM14,225 per annum. Which should he get?

If you buy term insurance instead of a whole life policy, you will be saving RM12,600 per annum, which can be used for other investments. At an 8% return on your investment over 20 years, you will gain RM576,600!

However, by spending that amount on a whole life policy, assuming you receive the entire premium paid (RM14,225 x 20 years), you will only get RM284,500 at the end of the day. That’s a whopping RM292,100 loss!

Mistake #3: Failing to increase savings when income rises

Good money management involves increasing one’s income over time. However, it will only improve your personal finances when your savings increases in tandem with your income.

However, the depressing truth is, when an employee gets a raise, he would spend the additional money on a better lifestyle (generally known as lifestyle inflation). He or she may upgrade his/her car to a better one, get a designer handbag or the latest mobile phone or enjoy a luxurious holiday. All these lifestyle upgrades cost money up front and to maintain, and as a result, savings will be sacrificed. Instead of saving, the average person will spend the extra income.

In comparison, a person who knows how to optimise his wealth, would maintain his current lifestyle and even has increased savings instead. Assuming that he invests RM1,000 per month at an average rate of return of 8% per annum  and increase his saving by 5% every year over 20 years , he or she would be RM863,457 richer.

It is important to note that none of the ‘mistakes’ mentioned above are in itself disastrous. However, their combined and compounding effect has an irreversible damaging consequence to a person’s net worth or wealth, and eventually robbing him/her of achieving financial freedom, giving the illusion that he/she’ll never make enough money.

Every single mistake, whether big or small, will have an impact on your finances when we look at it over a lifespan. So, do yourself a big favour and scrutinise every financial decision you’ve ever made and will make. Not everyone can afford to lose about RM1.5 million in their lifetime, especially not you.

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Imagine being on a treadmill going full power with a non-functioning On/Off button. Or swimming towards the lifeboat with the current going against you.

Both are very difficult situations to get out of. Unfortunately, both scenarios aptly describe how young Malaysians feel when it comes to dealing with the skyrocketing cost of living and the property prices that have risen relentlessly in the country.

Majority of the respondents in the Millennial Survey ranked high cost of living as their number one financial concern. The survey findings was align with last year’s Budget survey where the rising cost of living (87%) was the pre-eminent concern for Malaysians, while 39% was concern about the unaffordable property market.

While money concerns were already weighing heavily on people’s minds, this year we found out the extent of these concerns – among millennials in Malaysia.

“You, youngsters, have it way better than us!” So, says the Baby Boomers and the Generation X-ers. But, financially, it is far from the truth.

Here’s the alarming truth we found from the latest survey about millennials and money:

Millennials are having a tough time surviving financially

Keeping a roof over their heads, the lights on, food in the fridge, a car in the driveway — covering these everyday expenses is Malaysians’ biggest financial concern. With 86% of millennials in Malaysia rate cost of living as their top three biggest concerns, it is undeniable that many are finding it tough to make ends meet.

The survey included the following financial concerns as options displayed randomly, which respondents ranked from least to most challenging:

1. High cost of living
2. Unaffordable property prices
3. Unable to save money
4. Cannot afford to pay for unexpected emergencies or medical problems
5. Not having enough for retirement
6. Uncertain job prospects

Among the older millennials (30 to 36 years old), cost of living remains the highest ranking financial concern for them, while the young millennials (21 to 29 years old) find unaffordable property their biggest worry, followed by the high cost of living.

Though expenses such as food and petrol do not differ much for both age groups and also across income ranges, it becomes a problem when the lower income has to spend close to half of their income on food. This makes it increasingly difficult for this group of people to survive financial because the cost of food is only heading one way – up.

This is in-line with statistics released by the Government, where Malaysians spend 31.2% of their disposable income on food and food away from home; 23.9% on petrol, housing and utilities; and 14.6% on transport.

The findings also point to lack of money management skills among millennials, with the lower income spending 21% to 27% of their income on entertainment. This in turn results in their inability to save money, which is ranked the third biggest financial worry.

millennial survey

Despite the harsh financial situation they found themselves in, 51% of the respondents still manage to put away money for their golden years. However, 73% of them are still not ready for retirement as Malaysians need to save at least 10% of their income, on top of their compulsory retirement contribution with the Employees Provident Fund (EPF), to achieve two-thirds of their income in their golden years.

millennial survey

The fight for affordable housing intensifies

Slightly more than a year ago, Khazanah Research Institute (KRI) published a report that said the Malaysia’s housing market was “severely unaffordable” because the median house price is 4.4 times the median annual household.

The millennials’ inability to afford a home is exacerbated with the fact that they are buckling under the high cost of living.

Despite the various cooling measures introduced by the Government, the average house prices continued to increase in 2015, with a slight dip in the last quarter.

millennial survey

Based on the same report by KRI, Kuala Lumpur, Penang, Terengganu and Sabah have the highest housing affordability rate of 5.1 and above. For example, in 2014, the median all-house price in Kuala Lumpur is RM490,000, while the median monthly household income is RM7,620.

The repayment for a property of that price would be RM2,060 a month (90% loan, 4.40% p.a. with 35 years tenure), which makes 27% of the median household income.

It is hardly surprising for those in the 21 – 29 years old group to find unaffordable housing in the country to be the biggest financial worry for them, while the older Generation Y ranked it as their second biggest concern.

millennial surveymillennial surveymillennial surveyIn Malaysia, the maximum repayment period of a home loan is 35 years or until the age of 70, whichever comes first. This means, as we get older, it will be more difficult to get a home loan and even more difficult to afford one.

A 32-year-old respondent who states that he/she will only be able to afford a property in 10 years’ time, will be purchasing a property at 42 years old. A mortgage of RM500,000 at 4.40% per annum can only go as far as 30 years (70 years old – 40 years old), which makes the monthly repayment RM2,504, instead of RM2,335 (35-year tenure).

Which brings us to the next point…

Millennials are knee-deep in debt

There are many words to describe millennials and these are just a few that came to mind: YOLO, selfies, and ridiculously high debt.

Malaysia has the third highest car ownership in the world, with 93% of households owning a car, said Nielsen in 2014. It comes as no surprise that close to two-thirds of Malaysian millennials are carrying a car loan.

Our survey result also shows that more than half of millennials (aged 21 to 36 in 2016) have a mortgage, with median repayment of RM1,081.71.

millennial surveymillennial surveymillennial survey

The survey reveals shocking debt-to-income ratio among millennials. If your debt-to-income ratio is too high, any shock to your income could see you in a financial catastrophe.

Debt-to-income ratio is your total monthly debt over your gross monthly income. The higher it is, the worse off you’ll be. Those with high debt-to-income ratio may find it impossible to obtain anymore credit facilities from financial institutions, and they also run a higher risk of defaulting on their payments.

If your current debt is more than 60% of your income, any financial emergencies could leave you scrambling. The ideal ratio that banks look for when approving a credit application is below 60%.

The survey found that many millennials are highly leveraged, with the lower income groups having high debt-to-income ratio exceeding 100%. This means their debt repayment exceeds their income. This could easily lead to bankruptcy as these individuals would have no way of servicing their loans.

Our survey also found both credit card debt and mortgage inches up in tandem with our income, but it is alarming that the younger group of millennials with the lowest income (below RM1,500) has an average credit card debt that’s higher than their income, at  RM1,850.00!

The financial predicament that we are in

When it comes to recession, many Malaysians feel like the country is already in one. The common sentiment among millennials is, we are in or headed for recession. A whopping 49% thinks that we are already in recession, while another 41% says we will be soon in recession.

However, the truth is, Malaysia is far from recession. A recession is defined as a significant decline in activity across the economy, which go on for more than a few months. Though growth has slowed, Malaysia’s economy has grown in line with market expectations at 4% for the second quarter of 2016, and 4.2% in the first quarter.

However, this did not shake the perception of recession among Malaysians. Hardly surprising, with the financial hardship that most millennials are going through, many of them have to sacrifice major financial decisions just to survive in today’s economic climate.

As finances stretched thin, many millennials find themselves postponing some financial decisions, with 69% of the respondents said they have postponed or cancelled plans for vacations overseas, and 65% delayed buying a home.

Other decisions that are brushed aside are buying a car (41%), furthering your studies (37%), and getting married (30%).

With inflation growing by leaps and bounds, and wages – not so much – millennials feel that times are tougher than their parents’ era. Seven in 10 of the respondents think they have it harder than their parents did.

To many, their financially quandary is a culmination of a few factors:

millennial survey

Though these factors may be at play, there are also many other factors within our control that can help millennials out of their financial predicament. For example, a better management of their spending, debts and savings, could go a long way in helping them to not just survive, but thrive, even in bad times.

The upcoming Budget 2017 is expected to cover a few measures to help the bottom 40% household income group (B40) and middle 40% income bracket (M40) to deal with the high cost of living and purchasing their first home.

Though confirmed by Minister of Finance II Datuk Johari Abdul Ghani that 1Malaysia People’s Aid (BR1M) will be continued, any change to the quantum of the financial aid is not revealed. However, based on our survey last year, 95% of the BR1M recipients said that the aid was not enough to help them cope with the cost of living.

Hopefully, the national budget to be announced later this month should pull some new tricks out of its hat to really make significant strides in elevating the income of the B40, and solving the issue of affordable housing.

The respondents

The Edge Millennial Survey covers the urban dwellers with 75% of the respondents residing in the Klang Valley. Here is the breakdown of the demographics:

millennial survey

The information and/or data from the The Edge Millennial Survey 2016 may only be rebroadcasted or republished with full and proper credit and attribution to “iMoney Malaysia & The Edge” This survey was conducted between September 26 and October 6, with a sample of more than 1,200 Malaysians.

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Malaysia defines a senior citizen as someone above the age of 60, and according to the Statistics Department, those above 65 years old make up 1.9 million, or 6% of the population.

By 2030, the United Nations estimates an elderly population uptick to 15%, officially turning Malaysia into an ageing country.

Everyone ages and while retirement may be comforting, it is also nerve-racking. Retirees no longer enjoy the routine of drawing a monthly salary, meaning a heavy reliance on savings and pensions.

Latest data suggests that Malaysians are living longer, beyond the national average. While that is a good thing, it also leaves a larger number of people susceptible to illnesses such as dementia and Alzheimer’s, which are typical among senior folk.

Studies also found that people’s financial abilities decline from the age of 50 years old. To make matters worse, a person could be making a bad decision but feel perfectly happy with it. Such a bizarre example is actually normal as one ages.

The population boom comes at a time when Malaysians are wrestling with the rising cost of living and struggling to make ends meet.

One day they will have to confront ageing, either in the form of taking care of themselves as they age or even taking care of their elderly parents. Regardless of the circumstance, it involves money.

Here are a few scenarios that you need to consider when you are planning for your retirement:

Semi-independent living

Say, you are ageing healthily and have no major complications but may need some assistance such as house chores, which involves hiring a maid. You have paid your mortgage and car loan and have no outstanding loans and debts and want to live a simple lifestyle.

Here’s how much you’ll spend on average in a year in today’s value:

English-speaking maid
RM1,400 X 12 months
RM16,800
Medical check-up at a private hospital RM1,500
Medication & supplements
RM150 x 12 months
RM1,800
Annual premium for medical insurance RM3,500
Groceries
RM700 x 12 months
RM8,400
Transport (petrol & toll)
RM200 x 12 months
RM2,400
Yearly 3-day holiday within Malaysia RM1,000
Utilities (water, electricity, etc.)
RM150 x 12 months
RM1,800
Total RM37,200

However, this is a very conservative estimate and disregards many of the complications related to old age.

It merely assumes that the elderly person is able to live semi-independently with minimal assistance. However, that is not always the case.

As we age, our mental and physical health deteriorate, and we may find living on our own no longer an option at one point. This is when assisted living comes into the picture.

What’s the price of assisted living?

The thought of sending the elderly to a nursing home may be frowned upon in Asian culture. But taking care of an aging loved one is not easy and is a round-the-clock commitment.

Also, very few have the luxury of staying at home and tend to their family members full–time.

This is when assisted living arrangement can be considered to ensure the elderly person is taken care of comfortably.

For a semi-private room with basic care services, the average price is RM1,000 a month. A private room with trained nurses and in-house doctors providing professional and specialised healthcare will set a person back RM5,000 a month. Diapers and other services may be charged separately.

Full-time stay (per calendar month)
Twin Sharing Room
Walking, assistance with ADLS RM2,500
Bed-Ridden RM2,650
Multiple Sharing Room ( 3-, 4- or 5-bedroom)
Walking, assistance with ADLS RM2,300
Bed-Ridden RM2,450
Single Room
Single room with shared bathroom RM2,850
Single room with attached bathroom RM3,250
Couple RM3,800
Diapers (per month) RM300

Prices include: 24-hour care, assistance and nursing; health check-ups; six meals a day; reflexology/massage; physiotherapy; Astro TV; laundry.
*All rooms are fully air-conditioned.
*Medical-related fees are charged separately and prices vary according to care and treatment.
Source: Eldercare Nursing Home

 

Even if someone is in the pink of health, it has been advised to save up for a year’s stay at a nursing home.

Multiple-sharing room
RM2,500 x 12
RM30,000
Diapers
RM300 x 12
RM3,600
Medical check-up at a private hospital RM1,500
Medication & supplements
RM150 x 12 months
RM1,800
Annual premium for medical insurance RM3,500
Total RM40,400

That’s quite a huge sum to pay over a year. If one is required to stay in an assisted living environment long-term, you are looking at RM202,000 for five years. This cost does not involve medical expenses, such as check-ups, treatments and medication.

What if a senior citizen falls ill?

The top criterion that determines if someone elderly needs assistance or is able to live independently is his or her health condition.

According to the World Health Organisation, the top killer diseases among Malaysians are coronary heart disease and stroke.

Also in the country, the medical inflation rate is between 10% and 15% every year, and these diseases are not cheap to treat.

Treatment for heart attack costs between RM10,000 and RM30,000. In 30 years’ time, it will be around RM174,494 to RM523,482.

As for stroke, expect to pay RM35,000 to RM75,000. In 30 years, that will be from RM610,729 to RM1,308,705.

This cost will be on top of the living costs detailed above and it will likely wipe out a person’s retirement savings if he/she does not have adequate medical insurance coverage.

So, how much do you really need during retirement?

With the above scenarios in mind, you need to prepare for your retirement early to ensure adequate savings in your old age.

Assuming life expectancy of 75 years old, here’s a rough estimate of the total retirement savings that you need:

Total in today’s value Inflation adjusted total
(2% p.a.)
First 5 years
Independent living at RM36,000 a year
RM180,000 RM326,045.09
(in 30 years)
Next 5 years
Semi-independent living at RM37,200 a year
RM186,000 RM371,979.46
(in 35 years)
Last 5 years
Assisted living at RM40,400 a year
RM202,000 RM446,024.01
(in 40 years)
TOTAL RETIREMENT SAVINGS
RM1,144,048.56

Let’s say you are 30 years old and expect to retire when you are 60, the maximum age set for private-sector workers under the Minimum Retirement Age Act 2012, here’s how you can save up for the amount above:

epf-calculator

Assuming you start working at the age of 22 with RM2,000 monthly starting pay. Source: EPF/KWSP

Tip: One way to begin estimating your retirement costs is to take a close look at your current expenses in various categories, and then estimate how they will change. For example, your mortgage might be paid off by then – and you won’t have commuting costs.

Bottom line

Choosing whether to live independently or assisted boils down to myriad factors with financial and physical health topping the list.

In the long run if someone is fit as a fiddle, living independently costs less, but that depends on the person’s lifestyle before and during retirement.

If you are about to retire and think of roughing it out on your own, it’s best to ensure that you are in good health and you are on track in clearing debts. Being saddled with loans and mortgages will not only dent your chances of living independently but even make retirement an impossible dream.

Also factor in declining cognitive functions. Here is where you will need to have a companion or someone trustworthy to still check in on you from time to time. There are also a few handy apps to have in case of emergencies such as Doctor2U, an app that allows you access to doctors 24 hours, seven days a week.

If you have health complications and do not want to burden your family, then assisted care would be best as you will have someone to check on you from time to time. Some nursing homes have day care or even seasonal options where you only need to check in for a certain duration as opposed to full boarding.

If you are young with retirement years away, then it is best to protect that dream. Tap into your EPF Members Investment Scheme, where you will be able to invest a percentage of your savings in Account 1 in approved unit trust funds. The additional returns, if any, can boost your chances of surviving through retirement.

Learn to be financial literate and not only how to invest in stocks, shares and futures, to name a few, but to also be frugal and cut spending where necessary. Never neglect your health either. Yearly medical checks and an active lifestyle might help mitigate the effects of ageing.

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Will The Ghost Of 1998 Haunt The Ringgit?

There seems to be no respite for the ringgit: it lost 6% in the past month, it has been dubbed among one of the worst performing emerging Asian currencies, and it has lost the confidence of investors.

Just last Thursday, the Malaysian currency traded at 4.4707 to the US dollar, flirting with levels not seen since the depths of the Asian financial crisis more than 18 years ago.

Also, the ringgit is expected to suffer its fourth consecutive annual loss against the US dollar this year, despite efforts by Bank Negara Malaysia to stem the currency’s slide, leaving investors to ponder if they will see a repeat of 1998.

The central bank has reiterated that it would not tighten controls on the flow of funds across its borders and that the stepping in was to “maintain orderliness”. Its recent move was a crackdown on trading in the non-deliverable forwards market.

Explainer

Non-deliverable forwards (NDF) is an offshore, liquid market where investors exchange a certain currency for another because of restrictions in the domestic or onshore market.For example, if Investor A wants to exchange ringgit for US dollar but does not want to be confined to BNM rules, which governs forex trading in Malaysia (the domestic market), he will trade in Singapore or Hong Kong.

Source: Reuters

BNM then rolled out another policy on Friday which took a more export-friendly approach and at writing time, the ringgit has slightly stabilised.

“Still, the ringgit’s long-term outlook remains uncertain,” said analysts for Credit Suisse, echoing sentiments of volatility and more aggressive measures by the central bank.

So, the question we all ask is, will Malaysia see a repeat of 1998.

A resurgence of capital controls?

To recap, the ringgit plunged to a record 4.885 per dollar in 1998, leading then-prime minister Tun Dr Mahathir Mohamad to impose restrictions, including a peg at 3.80 per dollar and a ban on offshore trading in the currency.

He also blamed US billionaire George Soros and other “rogue speculators”; the peg was eventually scrapped in 2005.

“I don’t see this as likely,” said Nurhisham Hussein, head of economics and capital markets of the Employees Provident Fund.

Speaking to iMoney on the possibility of a 1998 parallel, he said Malaysia is a major commodity exporter and the country needed to have a flexible exchange rate to buffer domestic revenue from changes in global commodity market prices.

“Using capital controls to stabilise the ringgit exchange rate would be counterproductive, as we will be trading off currency volatility against Malaysian jobs and corporate solvency. Stamping down on currency volatility just transfers that volatility to Malaysian companies and workers,” he said.

Wan Imran Chik, a former international relations officer to a prominent politician and a critic of government fiscal policies, said what BNM viewed as a move to “speculate” against the ringgit was actually a move by investors to hedge against loses from the tumbling ringgit.

“BNM’s actions has ‘scared’ a lot of foreign investors and fund managers of the very possibility of capital controls, so such action is deemed as a step towards that direction.”

He told iMoney the consequences of reintroducing capital controls would have dire effects on the country, politically and economically.

It would not go well with foreign investors as that would be deemed a failure in economic management, he said, adding that once such a reputation is established, it would take a very long time to recover and restore the confidence of investors.

bloomberg-chart-ringgit-usd

The ringgit’s performance against the US dollar over the past month.
Chart courtesy of Bloomberg.

Stemming volatility

The ringgit, as well as the Indonesian rupiah, are among the favourites of global investors, making them Southeast Asia’s most volatile currencies.

Overseas ownership of Malaysian debt has climbed four times over in the past decade to 36%. Foreign ownership of the country’s bonds is one of the highest among five Asian economies tracked by the Manila-based Asian Development Bank.

That might seem like a vote of confidence but it is less desirable in times of financial-market stress, as evidence by the election of Donald Trump as US president.

“There’s no way to fully insulate ourselves from these, while still trying to be open to the rest of the world,” said Nurhisham.

“I think we need a deeper and broader onshore market. But the kind of currency volatility we have seen is largely due to the unusual uncertainty surrounding major geopolitical events.”

Explainer

Is the ringgit the worst performing currency in Asia?

Actually, the Turkish lira has been the worst performing currency in Asia this year, not the ringgit. If we are looking at East Asia specifically, the Filipino peso has performed the worst on a YTD basis, while for November, it’s the Japanese yen. This is indicative of what’s going on – a general sell-off in the rest of the world relative to the US dollar. The ringgit is hardly alone, though it has been hit harder than most.

Nurhisham Hussein said in an email to iMoney.

Political instability and oil prices are the main reasons the ringgit is volatile, said Adrian Koay, a dealer with UOB Kay Hian.

According to reports, the ringgit has been under pressure tracking feeble global crude prices and political tensions that has brewed since reports surfaced of an alleged scandal around state investment vehicle 1Malaysia Development Berhad, which is linked to Prime Minister Datuk Seri Najib Razak.

“Oil prices are hard to control, but if we worked on our country’s political issues, this will definitely bring more stability to the ringgit”, Koay told iMoney. (A counterargument to political risk and its effect on the ringgit can be read here.)

Tighter belts and ‘Cuti-cuti Malaysia’

The ringgit slide comes on the backdrop of higher living costs and soaring house prices that have left Malaysians struggling to meet the demands of daily life. Even vehicle sales took a dive in October, citing tepid consumer sentiment and a weak ringgit.

If the ringgit reaches new lows, imports and locally processed or manufactured products which rely on imported raw materials could rise, Wan Imran told iMoney.

“For example, Malaysia imports tons of wheat which is processed locally into flour and used by local food manufacturing companies to make bread. Malaysia also imports a lot of milk and dairy.

“We could see a rise in these products, so an increase in our living cost for daily consumption,” he said.

Money Hack

Follow these saving tips when it comes to food:

  • Buy more vegetables, less meat.
  • Stock up on GST-exempt items.
  • Pack lunches and prepare meals in advance.
  • Create a grocery list in advance to minimise what you spend on food.
  • Buy snacks in bulk.
  • Avoid upgrades in restaurant meals.
  • Cook in bulk and save leftovers for a day or two and have them for lunch or breakfast.

Nurhisham however provides a different picture. Based on research, he said one unusual finding over the last couple of years is that despite the ringgit’s sharp depreciation against the US dollar, it has had almost no effect on imported inflation.

“For most of 2014 to 2015, overall imported inflation outside was actually negative, while food inflation has been steady before and after the ringgit started falling.”

For the most part, the effect on Malaysians will be minimal unless they are travelling to the US or to countries within the US dollar bloc such as Hong Kong, he said, adding that there’s not much need to take precautions unless a person has dollar liabilities such as children schooling in the US.

Money Hack

To cushion volatility, turn to foreign currency current accounts. It allows you to keep foreign currency for future use and at the same time hedge against foreign currency fluctuation.

“We may just have to tighten our belts even further and, sadly, maybe even cancel any plans for trips or holidays abroad where the currency is much higher, or put such plans on hold and just settle for ‘Cuti-Cuti Malaysia’,” Wan Imran said.

Money Hack

Can’t go abroad for a vacation? Fret not, Malaysia has ringgit-friendly destinations that can give you that very same experience locally, with destinations ranging from nearby Kuala Kubu Bharu to Kundasang in Sabah.

And as for investors, their best bet is to diversify. “You can always move assets into different currencies. The more you diversify, the lesser risk you take,” said Koay.

And the future of the ringgit?

The ringgit’s steep decline against the US dollar started in September 2014, shedding 10.8% to end at 3.495 against the US dollar as at end-2014.

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.

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 September 2, 1998, when capital controls were imposed, the movement of the ringgit was restricted.

And it was only after Bank Negara relaxed the restrictions that local banks started offering some hedging mechanisms.

So with such an unpredictable track record, what do we make of the near future?

It will be bleak, around RM4.75 to RM4.80 against the dollar, unless the Malaysian government replenishes or top up foreign exchange reserves, said Wan Imran.

Nurhisham predicts this is a one-off market adjustment as global investors were taken off guard by the Trump election.

“As a result, most currencies including the ringgit will remain under pressure for the next month or so, especially with the Federal Reserve due to raise its policy rate in the middle of December.

“After that, and especially after President Trump officially takes over on January 20, I’d expect to see some reversal of capital flows to take place, as there’s no question that the markets have overreacted,” he said.

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