One of the pitfalls of investing in ringgit-denominated assets or funds is the risk of the Malaysian currency weakening against other currencies over time, which could chip away at or even wipe out the value of your returns.
That possibility is a very real one, given that the ringgit has been one of the worst performing Asian currencies since Donald Trump became US President last November. At its lowest point of 4.48 per US dollar on December 19, 2016, the ringgit was actually just shy of hitting its all-time low of 4.50 during the Asian Financial Crisis.
The Malaysian currency was already weakening against the USD last year, hit by low oil prices, talk of higher US interest rates and rising risks from a brewing money laundering scandal involving 1Malaysia Development Berhad.
But the main reason for the ringgit’s steep drop was a massive selloff in Malaysian Government Bonds by foreign investors in favour of USD-denominated Treasuries and stocks in the wake of the Trump presidency.
The ringgit rout culminated in March, when investors dumped around RM26.6 billion worth of government bonds, the largest monthly sell-off since 2011.
This year so far though, the currency seems to be making a comeback. The ringgit is now 4.33 after data showed Malaysian GDP expanded 5.6% in 1Q2017 compared to 4.5% in 4Q2016.
So is the worse over for the currency? How can investors avoid getting hit by a volatile ringgit?
On one hand, Bank Negara Malaysia’s moves to steady the ringgit appears to be working well. Last December, the central bank ordered local businesses with international affairs to convert at least 75% of their export proceeds to ringgit terms when they are brought back to the country. That’s helped to stabilise Malaysia’s foreign exchange reserves, which rose by US$400 million in March to a total of US$95.4 billion.
That move came a month after BNM ordered foreign investors to stop speculating on the ringgit in the non-deliverable forwards (NDF) market in November. The NDF market is the offshore marketplace where foreign companies and investors with dealings in Malaysia hedge their exposure to the ringgit.
Since then, speculation on the ringgit in the NDF market has slowed, allowing the currency to find a floor and stabilise.
On the other hand, geopolitical tensions are rising between North and South Korea as well as the US and Russia. That usually means strong momentum for gold and other assets denominated in USD, Swiss franc and yen, but weak demand for emerging market currencies like the ringgit.
Malaysian investors should look offshore for better investment opportunities
Whatever the case, investors should consider diversifying beyond ringgit-denominated assets and exploring investments in other currencies that have better potential to generate value and returns.
Investments denominated in the USD, for example, are one option. Given that unemployment and inflation levels are already nearing the Federal Reserve’s targets, US interest rates are expected to head higher this year, which makes for a stronger currency.
Notably, all of CP Global’s funds are based in the USD.
Other currencies, such as the British pound, have also appreciated significantly this year. The pound is at its highest since September 2016, trading 1.305 to the USD following data that UK retail spending for May rose 2.3%. Also, expectations for stronger 2Q2017 GDP growth are growing.
Meanwhile, the Japanese yen has also done well against the USD, while gold has risen in value in the wake of Trump’s recent political gaffes.
The bottom-line is not to restrict your investments to the Malaysian domestic market. Instead, look offshore, and “allocate your money to the best place globally” that offers better value and superior returns.