Tuesday, June 29, 2010

Where to invest a stronger ringgit

When China announced it was letting its currency trade with more flexibility last week, the ringgit, which has a high correlation with the yuan, hogged the limelight as among the region’s top currency performers. As at the time of writing yesterday, the ringgit has strengthened 10% to RM3.23 per US dollar, up from RM3.59 almost a year ago.

Given our stronger purchasing power, where should investors put their ringgit now?
Nor Zahidi Alias, chief economist of Malaysian Rating Corporation Berhad (MARC), reckons that everything depends on the perceived prospect of the ringgit against major currencies in the medium and long term.

“Against the USD, for instance, we believe that the ringgit’s strength may fade in the medium term as recent positive development is largely due to the People’s Bank Of China decision to adopt to a more flexible exchange rate regime, making it possible for the yuan to appreciate,” he said.

“Such an appreciation, if it happens, will temporarily strengthen the ringgit as there is a high positive correlation between the two currencies.”

However, the lingering problems in the European economy will, to some degree, moderate the growth of an export-dependent economy like Malaysia and take the shine off the ringgit in the medium term, noted Nor Zahidi.

Should the anxiety among asset managers re-emerge following the ongoing European economic debacle, a rush towards safe haven instruments will strengthen the US dollar, and put downward pressure on the ringgit, he added.

Under this scenario, Nor Zahidi reckons that short-term foreign denominated assets will be appealing for investors. “Their values will rise if the direction of ringgit suddenly reverses and starts to weaken,” he said.

“We feel that foreign currency denominated savings, for instance, in Australian dollar and other high yield currencies, are an attractive choice as they may appreciate in value in the medium term.” he said.

Robert Foo, principal consultant of MyFP Services Sdn Bhd, a licensed financial planning firm, pointed out that investors should not just focus on the more favourable currency exchange rate environment.

“For instance, some people note that the pound has depreciated and think ‘maybe I should buy an apartment in UK.’ But you should also consider things like will the property appreciate, and if you can rent the property out. Take into account that the UK property you buy may not be easy to manage unless you’re staying there,” he said.

“If your investment horizon is merely three to six months, you would essentially just be speculating,” he said. Investors should be looking at a time horizon of about three to five years and above.

“When you talk in those terms, a slight appreciation in the last few months should not be the main criterion in deciding where you put your money,” Foo says, adding that it remains uncertain if the ringgit will strengthen continuously in the next couple of years.

“What we normally advise our clients to do is to spread their money out in different asset classes and different currencies. Similarly, we always advise our clients to invest in funds that have exposure in different countries,” he said.

In the long term, the global economy will continue to recover despite the hiccups and bumpy rides brought on by European economic woes, said Nor Zahidi. “This will likely lead to a softening of the greenback as risk aversion continues to subside, thus weakening the value of US dollar against major currencies including the ringgit”.

In Nor Zahidi’s opinion, if Malaysia manages to address its long-term weakness in attracting private investments, the ringgit will undergo a structural change in its trend, strengthening towards the RM3.00 per US dollar level.

In this regard, fundamentally strong and high yield equities will be the top choices for long-term investors who believe in the transformation of the Malaysian economy and the recovery of the global economy, said Nor Zahidi.

“Similarly, bond funds which are heavily invested in good quality corporate bonds can provide greater upside as corporate cash flows generally move in line with gross domestic product (GDP) growth and with lower risk of default during a good economy,” he said, adding that for higher risk tolerance investors, investment in commodity products such as crude oil may pay off in the long term.

On the outlook of ringgit versus other major currencies like Australian dollar and British pound, Nor Zahidi said he’s more positive about the prospect of the Australian dollar.

”We see a continuous, although bumpy recovery of the Australian economy following an acceleration of China’s economy,” he explained. “Such development will lead to more hawkish stance by the Reserve Bank of Australia (RBA) which in turn strengthens the Australian dollar against major currencies including the ringgit”.

However, when it comes to the prospects of British pound within the next six months, Nor Zahidi is “less sanguine” about it.

“We anticipate a moderation in its economic momentum following austerity measures to be implemented by the government to address its budgetary problem,” he said, while clarifying that he is positive about the long-term prospects of the British economy, since it would be aided by global economy recovery.



Written by Lim Siew May
The Edge Malaysia

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