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Investing abroad: A worker counting US dollar notes at a money changer
in Kuala Lumpur. It is no surprise that by now, many Malaysians have accepted
the fact that the ringgit may not bounce back to RM3.20 to US$1 anytime soon,
and that it is time to diversify their assets by means of foreign investments.
Investing Overseas:
What You Need to Know
(Bond Fund)
STARBIZWEEK / Saturday 26
MARCH 2016 / personal finance
WITH the ringgit weakening over the past
year or so, those of you who haven’t already, are probably starting to toy
with the idea of investing overseas.
Diversification across markets, asset
classes and currencies is one of the basic tenets of investing. Those who
follow this strategy religiously would likely have seen their investment
portfolios perform better than those who remained entrenched in the local
market.
What used to be considered fairly robust
returns - such as ASB dividends of 8% per annum and EPF dividends of 6.5% per
annum - now seem menial if you take into account the 30% drop in the value of
our ringgit.
It is no surprise then that by now, many
Malaysians have accepted the fact that the ringgit may not bounce back to
RM3.20 to US$1 anytime soon, and that it is time to diversify their assets by
means of foreign investments.
This is good. But before putting your
money into foreign investments, you need to know what you are getting yourself
into, and carefully consider your decisions before making your moves.
Firstly, how much of your invest- able
assets should you allocate to foreign investments?
The rule of thumb is to allocate not more
than 30% of your investable assets into foreign currency investments. The
reason for this is that your daily life still revolves around the Malaysian
currency, and your foreign investment is merely a means of bolstering your net
worth.
Besides, if the US currency weakens, you
run the risk of losing a significant amount of money if your primary invested
assets were in US dollars. In recent months, anyone who bought into the
pessimistic view out of fear that the ringgit would touch RM5 to US$1 would
have seen the value of their foreign investment shrink owing to the
strengthening of the Malaysian currency. Therefore, putting more than 30% of
investable assets into foreign investments would be over-in- vesting, not to
mention highly risky.
The second point to consider is, how do
foreign investment markets fare in comparison to Malaysia?
If you have not had any experience
investing overseas, you may be in for a big surprise. Many Malaysians assume
that the investment market overseas works more or less the same way as it does
locally. However, this is not the case.
Unlike Malaysia, foreign investment
markets such as US,
Singapore and Hong Kong are far more open
and have fewer regulatory restrictions. There’s also less government support
for their market. As such, while these markets enjoy higher levels of global
portfolio fund flows, they also experience higher levels of volatility and
price fluctuations.
Let us take the example of bonds. In
Malaysia, bond investments behave almost like a fixed deposit type of
investment - steadily up and predictable (partly due to the accreting value of
bond coupons recognised by the fund over time). However, the same can’t be said
in other countries.
In the graph, you can see that a Malaysian
bond fund (Fund A) moved up steadily over the period of comparison whereas the
US (Fund B) and European (Fund C) bond funds experienced higher levels of
price volatility and underperformed Fund A. All three funds invest in somewhat
similar investment grade papers, only that they invest in different markets.
This is mind blowing for most Malaysian.
In fact, I had a client who once lost up
to 20% of his investment in an Asian bond fund domiciled in Singapore. What
made him very upset was that he wasn’t properly advised by the banker of the
risk exposure of such a fund. Had he done a little more due diligence or
consulted an independent financial advisor before investing into the fund, he
would not have been caught off-guard and suffered such a significant loss.
The same applies to equity investment
overseas. Many investors would have a hard time trying to adapt to markets
that are more volatile than our FTSE Bursa Malaysia KL Composite Index.
The next point to consider is this: How
safe is your capital when investing in foreign products? If things are not
going well, will you be able to retain your capital at the least?
Let me highlight the example of an
offshore commodity product that I once came across. This product focused on
physical trading of commodities like timber, metals, aquaculture, rice,
plant-based oil, crude oil and biofuel. It supposedly had an attractive track
record, yielding double-digit annualised returns for more than two years since
its inception. It targets to provide investors with a fixed 2.25% quarterly
distribution (i.e. a total of 9% per year).
One of the most common mistakes made by
Malaysian investors, however, is the tendency to look at foreign investments
through the lenses of their local perspective and experience. At first glance,
you might think this investment is no different than any other equity unit
trust funds available in Malaysia - a
credible alternative investment with good diversification credentials worthy
of consideration.
However, the product turned out to be a
scam and the investors lost all their money. This is not an isolated case. Due
to their limited knowledge and experience, many Malaysian investors fail to
differentiate genuine investments from scams. That costs them a lot of money.
Cashflow needs
Thus when investing in foreign markets, it
is always better to stick to licensed and reputable fund managers that invest
in regulated investments and markets. Lastly, before putting your money into
foreign investments, you should thoroughly assess your cashflow needs in
order to maximise the holding power of your investments.
A good cashflow management
practice is to establish one’s ideal cash
reserve before dabbling in investments. For working adults, this emergency fund
should be able to cover six months of one’s cashflow needs such as living
expenses, loan repayments and any olher lump sum cash requirements over the
next three years. I recall an incident where a client of mine underestimated
the amount of cash he would need to execute his plans of building a bungalow on
a plot of land he owned.
Only midway through the construction
process did he realise that he was short of cash, after having invested the
remainder of his liquid assets in foreign investments. In the end, in order to
complete his dream home, he was forced to withdraw his foreign investments at a
loss.
A situation like this could have been
easily avoided with a little bit more cashflow planning and foresight. Make
the necessary provisions for your short-term cashflow
needs and you will position yourself to
better withstand any unexpected investment market volatility.
Diversification of investments across
markets, asset classes and currencies is a recommended risk management strategy
for any investor and should be diligently pursued. However, never assume that
investing overseas is similar to investing in your home ground. In the case of
Malaysia’s relatively stable investment environment, entering into foreign
investment markets could be akin to stepping into rough sea from a calm bay -
it might come as a shock if you are unprepared.
Conduct your research thoroughly - find
out more about the investment environment, the country’s regulations, and
study the investment product carefully Consult a professional if required,
such as an independent financial advisor, to address any concerns you may have.
Once you’ve considered the above and decided to invest, make sure that you
monitor the performance of your investment closely.
The more volatile a market, the faster
you’ll need to take action on your profits or losses. Park your profits
somewhere safe to prevent losing it to the fluctuating market.
If your investment is making a loss, then
act fast with a contingency plan at hand.
Remember, the more prepared you are, the
more likely you are to succeed. All the best!
Yap Ming Hui (yapmh@whitman. com.my) is a
bestselling author, TV personality, columnist and coach on money optimisation.
He heads Whitman Independent Advisors, a licensed independent financial
advisory firm. For more information, please visit his website at www.whitman.com.my
What is Investment?
(1) Investment is the action or
process of investing money for profit or material result. "a debate over private investment in road-building"
Synonyms: investing, speculation; funding, backing, financing, underwriting;
buying shares "some tips for responsible investment" stake, share, money/capital
invested "an investment of $305,000"
Related articles
Learn How to Invest
What People Read Most?
Investment is the use of money to earn income or profit. The term also refers to the expenditure of funds capital goods - such items as factories, farm equipment, livestock, and machinery. Capital goods are used to produce other goods or services.
Learn How to Invest
What People Read Most?
Investment is the use of money to earn income or profit. The term also refers to the expenditure of funds capital goods - such items as factories, farm equipment, livestock, and machinery. Capital goods are used to produce other goods or services.
Many people invest part of their income for future financial gain.
Others make investments to protect the purchasing power of their savings
against rising prices,.
Investment promotes economic growth and contributes to a nation's
wealth. When people deposit money in a savings account in a bank, for example,
the bank may invest by lending the funds to various business companies. These
firms, in turn, may invest the money in new factories and equipment to increase
their production. In addition to borrowing from banks, most companies issue stocks
and bonds that they sell to investors to raise capital needed for business
expansion. Governments also issue bonds to obtain funds to invest in such projects
as the construction of dams, roads, and schools. All such in investments by
individuals, businesses, and governments involve a present sacrifice of income
to get an expected future benefit. As a result, investments raise a nation's
standard of living.
Kinds
of investments
Before making any kind of investment, a person should learn as
much as possible about how the money to be used. The person also should find
out what he or she can gain from an investment. Every investment includes some
risk - that is, a chance of loss. An individual should carefully examine the
expected income from an investment in relation to the degree of risk involved.
A person also should know if he or she can easily turn an investment into cash
that may be needed to take care of unexpected expenses.
Savings accounts are a common kind of investment. Money placed in
a savings account at a bank, building society or saving and loan association
earns interest at a certain annual rate.
Saving accounts and certificates yield small profits. They also
may provide little protection against rapid inflation - that is, a sharp,
general rise in prices. In spite of its disadvantages, a savings account is
suitable for investors of moderate means because it involves little risk that
the money will be lost.
Life insurance serves as a form of investment for many people. A
person may buy life insurance to provide financial protection for family
members in case the person dies or is disabled. In addition, with some polices,
the insurance company sets aside part of each premium. This sum, called the cash
value of the policy, accumulates and earns a specified rate of interest, as
does a savings deposit.
Business
investments. The purchase of a small business may be
the most demanding kind of investment. Investors may find that they must work
full time to make a profit. They should be sure the business will provide both
a satisfactory income and a reasonable return on their investment. Before
buying a business, people should study the industry, consider their operating costs,
and whether they have the ability to operate the business.
Property.
People invest in property when they buy a home, land, or rental property.
Property may have considerable resale value. It also may produce income—directly,
in the form of rent; or indirectly, in the form of crops, mineral resources, or
timber. Property is considered an especially good investment during a period
of inflation, when the value of property tends to rise. On the other hand,
property values can fall sharply during a recession or a depression.
Bonds include government securities and corporate bonds.
Government
securities are normally issued by central
government. They pay interest at a specified rate after a certain period of
time.
The savings bonds issued by central government are popular
among small investors because of their low purchase price and great safety.
Treasury bonds are tradeable on
stock exchanges. Most treasury bonds pay a higher rate of interest than do
savings bonds because their price may change considerably from time to time.
Some governments sell securities called treasury bills. They yield high
interest during periods of inflation and low interest during recessions.
Corporate
bonds are loans made by investors to business firms. A corporation
pays each bondholder interest every year until the bond matures. At that time,
the corporation must redeem the bond by paying its face value, which is
its stated value. The prices of bonds may change due to variations in market
interest rates.
Ordinary shares or equities represent shares of ownership in a
company. The shareholders of a firm share in the profits and losses of the
company. If the company has a year of high earnings, the shareholders receive
cash dividends.
A company may decide to use its profits to expand the business,
rather than pay dividends. But some shareholders do not care much about annual
dividends as long as the price of the shares rises. The increase of the value
of shares permits a capital gain, the profit received from the sale of
shares.
Preference
shares are a form of corporate security that has features of both bonds
and ordinary shares. Like a corporate bond, preference shares have a fixed rate
of return. This return must be paid before any ordinary share dividends can be
distributed. Thus, preference shareholders can expect a more assured income
than ordinary shareholders. Unlike bond owners, however, preference
shareholders do not have the legal right to make a corporation pay them annual
returns if the firm has not earned enough to do so.
Mutual funds are companies that invest in a variety of securities
and sell shares of their own stock. They offer several advantages to small
investors. For example, mutual funds employ specialists who select stocks or
bonds that they consider most likely to yield profits.
Stock markets are organizations which enable investors to buy or
sell government securities and company shares. Investors deal through brokers
who are members of the exchange.
Ordinary shares and preference shares both can earn larger profits
than bonds can. In fact, over long periods of time, the return on shares has
consistently been much higher than the return on bonds or on other kinds of
investments. But, shares also involve a greater risk of losing money. Share
values change continually, and often by large amounts. As a result, investors
have no assurance that they will get back the full purchase price of their
shares. A business recession or poor company management may reduce a firm's
earning power and lower the price that people are willing to pay for the firm's
stock. Shareholders might then lose money if they sold their shares. In many
cases, stocks also provide poor protection against inflation.
Related articles: Bank, Bond. Building
society, Commercial paper, Credit union, Depression, Inflation, Insurance, Interest,
Investment banking Money, Money market fund, Mortgage Stock exchange Stocks and
shares Trust fund Unit trust
Investment
Banking
Investment banking is a business
activity in which a company purchases newly issued securities, such as stocks
and bonds, from businesses and governments. Such a company, called an
investment bank, then resells the securities to individual investors in smaller
quantities. Thus, the investment bank helps large borrowers raise money
quickly and efficiently by taking over much of the job of marketing the stocks
and bonds that are being issued. Without investment banks, businesses that lack
experience in doing so would have to market their own securities.
Investment bankers also advise businesses in arranging corporate
mergers and acquisitions. Investment banks do not accept deposits from the
public or make loans to businesses or individuals.
Investment banks buy securities at a slightly lower price than
they expect to sell them for. The difference between the purchase and sale
prices represents profit. Sometimes, however, the investment bank overestimates
the demand for the securities it buys, and must sell them at a loss. Thus, the
investment bank assumes the risk of making or losing money on the sale of
securities. To avoid this risk, a business or government sells its securities
to the investment bank for less than it might get by selling them directly to
investors. See also Investment; Stock exchange.
ECONOMICS
Job Market, Consumer Confidence and Finance
JOB MARKET
Unemployment rate
Job vacancies
Business confidence and
Bankruptcies
The job market is the market in which employers search for employees and
employees search for jobs. The job market is related to the unemployment rate
and household income. The correlation between areas with high unemployment and
underperforming property prices is hardly surprising. Clearly demand to live in
those areas is likely to be lower. Most people will aspire to live in areas
with better job opportunities. These areas provide better social conditions
while the residents have higher disposable income. Some indicators that show
the conditions of job market include unemployment rate, job vacancies, business
confidence and bankruptcies.
Unemployment rate
Unemployment rate measures the number of
people looking for a job as a percentage of the labour force. The following
link provides data of unemployment rate from Department of Statistics Malaysia
- actual data, historical chart and forecast.
Job vacancies
Job vacancies are the total number of
vacant jobs in the market. The following link provides job vacancies data from
central bank of Malaysia - actual data, historical chart and forecast.
Business confidence
Business Conditions Index survey covers 11
industries represented by 350 manufacturing businesses incorporated locally and
overseas. Questions posed in the survey cover production level, new order
bookings, sales performances, inventory build-up and new job openings. A value
above 100 indicates expected improvement in conditions, a value below 100 shows
lack of confidence and 100 indicates neutrality. The following link provides
business confidence data from Malaysia Institute of Economics Research - actual
data, historical chart and forecast.
Bankruptcies
Bankruptcies account for insolvent
corporations that cannot repay their debts to creditors and carry on with their
business. It is one of the important indicators that reflect the strength of
businesses in the market to generate new jobs. Higher bankruptcies mean weaker
capability to create new jobs and vice versa. The following link provides bankruptcies
data from Bank Negara - actual data, historical chart and forecast.
CONSUMER CONFIDENCE
Consumer Price Index (Inflation rate)
Consumer Sentiments Index and
House Price Index
Consumer confidence is a gauge of the
health of the economy as determined by consumer opinion. Consumer confidence
takes into account an individual s feelings towards his financial health, the
health of the economy in the short-term and the prospects for longer-term economic
growth. It signifies the willingness of individuals to expand or cut down their
expenditures in near future. When consumer confidence is less positive, markets
react bearishly and vice versa. Consumer confidence in the housing market can
be observed through three key indicators: consumer price index (inflation
rate), consumer sentiments index and house price index.
Consumer Price Index (Inflation rate)
Inflation is one of the most influential
factors that affect consumer confidence. Consumers cut down their spending when
they feel the pain in increasing prices. In Malaysia, the most important
categories in the consumer price index are food and nonalcoholic beverages
(30% of total weight) and housing, water, electricity, gas and other fuels (23%
of total weight). Others include transport (15%); communication (6%);
recreation and culture (5%) and furnishings, household equipment and routine
household maintenance (4%), Restaurants and hotels (3.2 percent and
miscellaneous goods and services at (6.3%). The following link provides
Malaysia inflation rate from Department of Statistics Malaysia — actual values,
historical data, forecast, chart, statistics, economic calendar and news.
Consumer Sentiments Index
The Consumer Sentiments Index survey is
conducted quarterly on a sample of more than 1,200 households. Respondents are
asked to evaluate their household s current and expected financial positions
and their employment outlook. Questions relating to plans to buy houses, new or
used cars and other major consumer durable are also asked. A value above 100
indicates expected improvement in conditions, a value below 100 shows lack of
confidence and 100 indicates neutrality. The following link provides Malaysia
Consumer Sentiments Index from Malaysia Institute of Economics Research —
actual data, historical chart and forecast.
House Price Index
The house Price Index is measured by the
annual change in the house prices. House prices on average increase every year
at different rates when the economy is good. Annual increment of house prices
reduces (or sometime a decrement) when the economy is turning bad. Thus,
fluctuation in house price index is in line with consumer sentiments index. The
following link provides Malaysia House Price Index from Bank Negara — actual
data, historical chart and forecast.
FINANCE
Bank lending rate
Interbank Rate
Loan Rejection Rate
Access to finance is probably the most
influential factor to property market as most people have to finance their
property purchases. The ability of individuals or enterprises to obtain
financial services, including credit and mortgage loan, determines the
liquidity of capital required in a property market. Market will slow down if
the credit available to buyers dries up. We can assess the ease of access to
finance by observing the change in bank lending rate, interbank rate and loan
rejection rate.
Bank lending rate
The bank lending rate is the average rate
of interest charged on loans by commercial banks to private individuals and
companies. Most property investors, especially homeowners, focus on changing
mortgage rates because they have a direct influence on real estate prices.
However, interest rates also affect the availability of capital and the demand
for investment. As investors foresee increased variability in future rates or
increase in risk, risk premiums widen, putting increased downward pressure on
property prices.
The following link provides Malaysia Bank
Lending Rate from Bank Negara — actual data, historical chart and forecast.
Interbank Rate
The interbank rate is the rate of interest
charged on short-term loans made between banks. As interbank rates decrease,
the cost of funds is reduced and funds flow into the system; conversely, when
rates rise, the availability of funds decreases. As for real estate, the
changes in interbank lending rates either add or reduce the amount of capital
available for investment. When capital availability is tight, capital providers
tend to lend less. This means that loans are made at lower loan to value
ratios, thus reducing leveraged cash flows and property values. The following
link provides Malaysia Three Month Interbank Rate from Maybank Croup - actual
data, historical chart and forecast.
Loan Rejection Rate
Rejection of a mortgage loan application
by the prospective lender comes as a result of the borrower's perceived
inability to pay back the loan. However, if the rejection or denial rate is
increasing or decreasing significantly, it signifies a change of credit and
capital available to the market. Rehda includes update of mortgage loan
rejection rate in its reports.
Though the above analysis is not
extensive, once we have an idea of changes in all above factors, we can better
understand property market conditions and predict where the property market is
heading for. Now start gathering these data, have a look into them and see what
they can tell you. You will soon realise that you don’t need a crystal ball to
tell you what is going to happen in property market.
This analysis was contributed by:
Dr Ong Kian Leong (commonly addressed as Dr
OngKL) is the creator of GoFinance. He is also the master trainer of Property
Method and blogger behind www.reijb.com
(Real Estate
Investment Blog).
(Adapted from: New Straits
Times/1Klassifieds/April 14, 2016 (Thursday)
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