Weak Reserves Spur Ringgit’s Biggest Quarterly Loss

A currency trader calculates Malaysian ringgit notes at a currency exchange store in Kuala Lumpur on Tuesday. (AP photo)

Malaysia’s ringgit fell on Tuesday, headed for its biggest quarterly loss since 1997, as the relatively low level of import cover afforded by the nation’s foreign-exchange reserves makes the currency more vulnerable to an emerging- markets selloff.

Malaysia’s ringgit fell, headed for its biggest quarterly loss since 1997, as the relatively low level of import cover afforded by the nation’s foreign-exchange reserves makes the currency more vulnerable to an emerging- markets selloff.

The country’s reserves have declined the most among Southeast Asia’s five biggest economies in 2015 and Moody’s Investors Service said in August that while they are sufficient, their adequacy is the weakest in the region.

The holdings recovered for a second straight fortnight in the first two weeks of September, suggesting the central bank scaled back its intervention. The currency slumped to a new 17-year low on Tuesday, while five-year government bonds and the benchmark stock index also fell.

The ringgit’s drop was due to “the usual concerns around emerging-market growth and the weakness in equity markets,” said Khoon Goh, a Singapore-based foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “Although there is already a lot of negative news priced into the ringgit, the fact that Malaysia has the lowest reserve adequacy in the region means the currency is more vulnerable during times of market volatility.”

The currency depreciated for a sixth day and closed 0.7% lower at 4.4565 a dollar in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. It earlier reached 4.4800, the weakest level since January 1998, and has plunged almost 16% since June 30.

The ringgit has lost more than any other Asian currency this quarter as a slump in Brent crude weighs on earnings for the region’s only major net oil exporter, just as a looming US interest-rate increase spurs outflows from emerging markets. China’s deepening economic slowdown, a political scandal involving Prime Minister Najib Razak and rising debt at state investment company 1Malaysia Development Bhd. have compounded the losses.

Malaysia’s foreign-exchange reserves rose 0.6% to US$95.3 billion in the two weeks to Sept 15 but are still 18% lower than at the end of last year. They were enough to finance 7.3 months of retained imports, compared with 8.4 as of Dec 31, according to the central bank. The reserves declined to a six-year low of $94.5 billion in early August.

The cost to insure the nation’s sovereign bonds from default for five years climbed to 243, the highest since 2009, CMA prices show. The credit-default swaps don’t reflect underlying economic strength, Mohd Irwan Serigar Abdullah, secretary general of the Treasury, said in an e-mailed statement on Saturday. The reaffirmation of Malaysia’s credit rating by the three major assessors backs the “government’s commitment to implement sound macroeconomic policies and fiscal reform initiatives,” he said.

The government sold 2 billion ringgit ($447 million) of 15- year bonds on Tuesday before 11 billion ringgit of debt matures on Wednesday. The securities yielded 4.791% at the auction, which got orders for 2.17 times the amount on offer, the highest since June.

In the secondary market, the five-year yield rose seven basis points to a one-month high of 4.01%, according to prices from Bursa Malaysia. The 10-year yield earlier climbed to 4.5%, the highest for a benchmark of that maturity since 2008, before retreating to 4.35% at the close.

Malaysia’s Bursa Malaysia KLCI Index of shares fell 0.3%, taking its drop this quarter to 6.1%. Overseas funds have pulled a net 17.7 billion ringgit from the nation’s stocks this year, surpassing the 6.9 billion ringgit for the whole of 2014, according to a report Monday from MIDF Amanah Investment Bank Bhd. (Bloomberg)

What To Do When Stock Markets Get ‘Crazy’

Sometimes it’s hard to think rationally when the stock market seems to be behaving so irrationally. Knee-jerk reactions to rapid stock market movements have cost the average investor millions and millions of dollars in recent months.

At times it may feel like the sky is falling, but it’s really not. Market volatility is a normal part of the normal market cycle. But each time we experience severe market volatility, most investors feel like “this time it’s different”. I believe it was Mark Twain who said, “History doesn’t repeat itself, it just rhymes”.

In times of severe market volatility it’s always a good idea to go back and review your investment basics and your long-term investment plan. Your two greatest defenses during volatile market times are patience and discipline.

The discipline part actually comes into play when you are constructing your portfolio. Diversification has always been an important part of building a successful long-term portfolio.

Diversification is not going out of style. Hopefully, it didn’t take a market shakeup for you to realize this. The whole idea of diversification is to own different assets within your portfolio that don’t all react the same way to any given set of economic or geopolitical circumstances.

This is why “alternative” investments have gained in popularity in recent years. Assets such as real estate, commodities such as oil and gas, hedge funds and private equity typically have a low correlation to the stock market. In other words, every time the stock market goes up the alternative investment does not and every time the stock market goes down, the alternative investment does not.

By diversifying, we are admitting that we don’t know the short-term direction of any of the investment markets. What we do know is that a well diversified portfolio, over time, will give us our best chance of achieving our long-term financial goals.

I also believe that the more volatile the markets become, the more important active management becomes. There are stock mutual fund managers out there who have a pretty consistent record of beating the market when the markets are down. They typically will leave some money on the table during strong up markets and will tend to do better than the general stock market’s when markets are down. I prefer this type of smoother ride.

Then there are those people who try to time the markets. This is extremely difficult to do well. Most investors want to buy stocks when they are doing well (priced high) and sell stocks which are doing poorly (priced low). This is called “buying high and selling low” when what you want to be doing is “buying low and selling high”.

Remember, time in the market is much more important than timing the market. Working with a financial advisor during difficult market times is often beneficial as they can help keep the average investor from irrational behavior. Find a financial advisor you trust and then listen to his or her advice. (journal-topics)

Investors Warm to Structured Products, Private Trusts

Investors are looking more and more at structured products and private trusts in order to handcraft risk and return on investments, according to panelists at the NorthStar Summit. The summit brings together investors and advisors and is currently underway in Nashville, Tennessee.

Although banks no longer offer some types of structured products - like swaps on hedge funds - in the wake of Dodd-Frank, it is still possible to provide structured products on top of mutual funds and managed accounts. As investors hunt for return, financial engineers seem willing to find new ways to meet that demand.

"Structured products can be used to craft a return profile from a specific exposure. They can also give investors an alternatives-like investment with a structured payout, which makes it appealing for certain types of investors," said Michael Macchiarola, a lawyer with Cadwalader, Wickersham & Taft in New York.

He adds that there is still some risk, however, because there is no guarantee if a structured product were to go on to the secondary market. Even with this risk, panelists which included Macchiarola, and bankers from the structured products group at Barclays, say they have seen an interest in the offerings - especially from managed account holders.

"Structured products have a defined lifetime, and certain exposures may be more suitable as a structured product than in a '40 act wrapper," said Chris Burke, a vice president at Barclays. These offerings can give investors access to MLPs or commodities without having direct exposure to the underlying investment, for example.

It is also worth noting that as banks have pared back their retail structured products business, and their ability to provide structured products with hedge funds, the growth of their use with managed accounts seems to reflect the choices of investors simply running out of other options.

Private trusts have also become more popular as investor demand grows. Private trusts give investors the ability to take more or different types of risk than traditional trusts, placed in the hands of big bank trustees, have in the past. This can be appealing for high net worth investors. According to the panelists, investors are looking for any structure that allows them to enhance returns in a still tepid market. (opalesque)

Dynamic Portfolio Management in Volatile Markets

Volatility presents an opportunity for portfolio and asset managers to diversify their portfolios

Since the beginning of the year, markets around the world have undergone a roller-coaster ride. The year started with uncertainty over the short term direction of oil prices and then Greece bail out concerns. Off late the markets have turned bearish on the back of slowdown in China and the likely impact of Iran deal on regional markets. As a result of these events, investors have turned more cautious as they prefer to wait on the sidelines to preserve cash and allocate fresh capital when the outlook brightens in the near future.

The array of events witnessed during the last eight months has led to increased volatility in the markets and a decline in real estate activity (both value and transactions) as both these asset classes are common portfolios. Although there is high volatility in the markets, which are challenging from an investor’s perspective, it presents an opportunity for portfolio and asset managers to diversify their portfolios into other asset classes such as commodities and private equity. This will enable them to realign their existing portfolios (equity and real estate) and reduce volatility. Additionally, investors should utilise this period to increase the cash allocation to create a buffer/pool that can be utilised to allocate fresh capital once the environment stabilises.

The crisis that started in 2008 led to a fallout in all the assets classes across the globe as investors were clueless about the nature and extent of the crisis. However, the situation started easing out in 2010 and since the beginning of 2012, the markets have witnessed a bullish period as most of the asset classes reported strong rally fuelled by the economic recovery from 2008 crisis. Hence, a long-term investor will review or take a closer look at the past six to nine months as a period of consolidation and re-evaluate the current portfolio to reflect current market conditions to built a dynamic portfolio.

Dynamic portfolio management is the best way to mitigate the risk that arises from changing market environments. Inflation, uncertainty, volatility and oil prices are all obstacles, however, these can be managed efficiently with active portfolio management strategies that are based on current market dynamics. A passive portfolio can potentially increase the risk especially if it is not aligned with the prevailing market conditions. Therefore, it is always advisable to have an active, knowledgeable and market based portfolio management to mitigate the risk and optimise the returns to outperform the market or index portfolios.

Given the current investment environment, the optimal portfolio allocation would comprise of 

• equities (40 per cent), 
• alternative investments including real estate and private equity (40 per cent), 
• bonds (10 per cent), 
• commodities excluding oil (8-9 per cent) and 
• cash (1-2 per cent). 

Additionally, it is also important to consider the duration of the investment and the stage of the investment cycle as it will provide a clear perspective for long term investments. For instance, a prolonged high inflation environment (e.g.) + 5 per cent every year for three to five years) can certainly become detrimental to the value of a portfolio but a short period of reasonable inflation (e.g.) +2-3 per cent every year for one to two years will have less impact on the portfolio, especially if the portfolio is constructed in an inflation friendly manner.

Another key consideration would be to focus on inflation-friendly sectors as investments in sectors, asset classes and companies that benefit from high prices can protect the portfolio against general inflation as the value of investments will outperform the level of inflation. For instance, increased exposure to companies in the consumer sectors such as retail or FMCG would be beneficial in a high inflationary environment.

Investors should also seek for dividends given that investment income is a natural hedge against inflation as it either augments capital gains or minimises capital losses. Investments and/or asset classes that have a strong history of dividend payouts will continue that trend even in an inflationary environment thereby allowing an investor an extra stream of investment income to offset the inflation impact.

Therefore, companies that are growing and committed to a strong dividend payout history make ideal candidates for such a portfolio strategy.

Although bonds as an asset class offer a viable option in stable market conditions but they tend to suffer the most in an inflationary environment as compared to commodities (ex oil), real estate and equities which often fare better. Therefore, reduced exposure to bonds would be advisable in the near future.

From the commodities perspective, buying gold would be advisable, especially if it viewed over a long term. Given commodities and gold have been very volatile recently especially in short-term windows, investors should buy gradually and on market weaknesses, thereby spreading and averaging down the cost.

In conclusion, dynamic portfolio management aims to complement existing asset allocation while making the portfolio more robust in an increasingly uncertain and volatile environment. Therefore, rather than focusing on market turbulence, investors should focus on developing and maintaining a sound investment plan. The ability to adapt to a changing environment will be the key to success and those who can see beyond short-term volatility by focusing on the principles of dynamic portfolio management will be rewarded for their patience and discipline. (gulfnews)

Foreign Investors May Pull US$1b Out of M’sia This Week

"The risk-reward of investing in Malaysia's assets is quite unattractive for now," said a lead portfolio manager for local currency debt at Neuberger Berman in Singapore.

Do Malaysia, South Africa Deserve Junk? Moody's Model Says Yes

Six developing nations including Malaysia and South Africa deserve to follow Brazil into junk status, if credit-default-swaps traders are to be believed.

Two weeks after the Latin American country lost its investment grade at one of the three major ratings providers, CDS investors are punishing other emerging markets facing similar challenges, sending their implied ratings at least five levels below their official grades, according to data from Moody’s Corp. Malaysia is A3 at the company, though traders see it six levels lower at Ba3. South Africa, which is a Baa2, is viewed as a B1 borrower. Three Aa3 nations including China are perceived by the markets as deserving the lowest investment grade.

Most developing nations are confronting the same issues that saw Brazil losing its investment-grade rating at Standard & Poor’s -- a plunge in commodity prices, a slumping currency and political turmoil. Sputtering growth in China and the prospect of higher U.S. interest rates are also boosting concern of more downgrades across emerging markets. Having been censured for laxity during previous market meltdowns, the ratings providers won’t want to be caught failing to act this time round, Per Hammarlund of SEB AB said.

“The deterioration in commodity-dependent economies’ credit-risk metrics can lead to more downgrades in emerging markets in the next three to six months, if not earlier,” said Hammarlund, the chief emerging-markets strategist at SEB in Stockholm. “The rating agencies were roundly criticized for being slow to react during the 2008 crisis as well as the 2011 euro-zone crisis. They are going to be much more trigger happy this time.”

Leading Indicator

While investors don’t always agree with official grades, the gaps for these nine countries are some of the biggest among the 65 borrowers tracked by Moody’s implied-ratings model, which is based on CDS prices as of Sept. 21 compared with peers in the same ratings category. While the investors’ ever-changing opinions are not an input into the ratings decisions, the company’s analysts study them to understand why the gaps exist, according to Moody’s.

“Market-implied ratings tend to ‘lead’ Moody’s ratings, given financial markets’ propensity to instantaneously incorporate information,” Irina Baron, an assistant director at Moody’s Capital Markets Research Group, said by e-mail.

Finance-ministry officials in Chile and Malaysia didn’t respond to requests for remarks. A National Treasury spokeswoman in South Africa declined to comment. Middle Eastern and Turkish governments were closed for the Eid holiday.

‘Matching Peers’

“Calculating an implicit market rating based on the price of CDS as a proxy to measure the fundamental credit rating of a country is not appropriate,” Peru’s Finance Ministry said in a message to Bloomberg. “Peru’s CDS is highly correlated to its peers in the region such as Chile, Colombia and Mexico,” the ministry said.

Political disputes are a key hindrance to investors’ perception of emerging-market creditworthiness. Protesters in Malaysia are calling for Prime Minister Najib Razak’s resignation over a funding scandal and Turkish politicians are preparing for premature elections after failing to form a coalition government.

Depressed oil prices have hurt producers. Saudi Arabia is heading for the biggest budget deficit in almost three decades, while the shortfall in Bahrain is forecast to double this year from 2014. Although Bahrain may retain its investment grade this year, it remains vulnerable to a downgrade because of fiscal challenges, Bank of America Merrill Lynch economist Jean-Michel Saliba said in a note Thursday.

The risk of a default by Kazakhstan within 12 months is at a historical high, according to Bloomberg’s sovereign-risk model.

Even as investor pessimism pervades these nine nations, Brazil, too, may be at risk of more downgrades as confidence wanes in President Dilma Rousseff’s economic policies. The country, which still has investment grades at Moody’s and Fitch Ratings, saw its implied ratings trade six steps below the official level.

The Malaysian ringgit, South African rand and Turkish lira were the worst performers against the dollar on Thursday among 24 emerging-market currencies tracked by Bloomberg. (bloomberg)

Malaysia's ringgit eyes worst week since 1998

Salt continues to be rubbed into the wound of the ringgit, with the currency on track for its worst weekly performance since the Asian financial crisis.

It hasn't been the best week to be an Asian currency in general, but the ringgit has fared worst among regional peers. Not content with being down 17.3 per cent year-to-date to Friday the 18th, the currency weakened a further 4.2 per cent this week to Myr4.3868 per US dollar in Asian trade today, writes Peter Wells.

That puts it on course for its worst week since a 4.6 per cent drop in the week ended June 26, 1998. Youch.

The ringgit has had a few bad weeks of late, in excess of -2 per cent, but a drop of 4 per cent or more hasn't happened for a long time. More confusingly, at a basic level, Asian currencies declined this week despite the Federal Reserve deciding last week not to raise interest rates at its September policy meeting in a move that should have led to a weaker US dollar. That said, many currencies had rallied against the US dollar in the lead up to the meeting in case of the old "buy the rumour, sell the fact".

There's little doubt among analysts that the low value of the ringgit is a substantial problem for Malaysia and its policymakers, but there's some variation of opinion about what it might mean for benchmark interest rates in the country.

HSBC notes "the tumble in the ringgit over recent months is likely to have led to a material tightening of financial conditions. Since growth is relatively credit intensive, this is bound to impact demand in the coming quarters."

On the outlook for rates, ANZ analysts expect Bank Negara Malaysia to keep rates on hold, and in "wait and see" mode for the remainder of 2015. They add:

Growth risks –arising from slower private consumption and the knock-on effects of structurally lower prices throughout the oil and gas industry – have diminished the odds of a hike. In fact, hiking rates to defend the ringgit will likely be futile. Easing monetary conditions while allowing currency weakness may appear to be an attractive orthodox policy when growth momentum ratchets lower, especially with counter-cyclical fiscal policy constrained by soft energy prices and 1MDB concerns limiting its flexibility. However, monetary easing will further weaken the currency and possibly exacerbate capital outflows.

Although Capital Economics thinks interest rates will "remain on hold in the coming months, a further slump in the ringgit could prompt the central bank to hike rates." (ft)

Does Malaysia’s ringgit face 1997 all over again?

Kiyoshi Ota | Bloomberg | Getty Images

The sell-off in the Malaysian ringgit, already among the world's worst performing currencies, may run further amid a toxic mix of shaky economic fundamentals and the spreading of what is being called the country's worst-ever political crisis.

The ringgit has fallen around 40 percent over the past year, with the U.S. dollar fetching around 4.34 ringgit on Thursday. That's the Malaysian currency's weakest against the greenback since late 1997, when the dollar at one point fetched as much as 4.88 ringgit.

"There remains significant downside risk even after the sharp ringgit correction," Hak Bin Chua, an analyst at Merrill Lynch in Singapore, said in a note Wednesday, noting that he sees little comfort from claims Malaysia is much stronger than in 1997, when it took a wallop from the Asian Financial Crisis (AFC).

Read More > Timeline: The twists and turns in the tale of 1MDB

"Some leverage indicators are much higher than in 1997, including household, public and external debt," Chua noted, citing data showing household debt as a share of gross domestic product (GDP) is almost double at 86 percent, compared with 1997's level of 46 percent. He noted public debt as a percentage of GDP is also significantly higher at 54 percent, up from 31 percent in 1997.

"The ringgit depreciation has not strengthened exports or improved the trade balance at all," he said, adding he also expects foreign investors will begin unwinding their holdings of Malaysian government bonds once the Federal Reserve begins increasing interest rates, expected later this year. Foreign investors currently own 47 percent of Malaysia's rinngit-denominated debt that is currently outstanding.

"The current currency crisis may not be a repeat of history and 1997, but it sure rhymes and is probably far from being over," he said.

Chua sees another factor as set to weigh on the currency's prospects: "The current political crisis, sparked by the 1MDB scandal, is the worst in Malaysia's history."

Read More > Why investors are snubbing Malaysian 'bargains'

The 1Malaysia Development Berhad (1MDB) fund, launched in 2008 to promote economic development, has been in the limelight for months, amid allegations of false auditing, huge debt and, more recently, financial fraud. In July, the Wall Street Journal published a report alleging nearly $700 million flowed from the fund to Prime Minister Najib Razak's personal bank account. Najib has repeatedly denied any wrongdoing. Singapore and Switzerland have both suspended bank accounts tied to 1MDB and in the U.S., media reports said the Federal Bureau of Investigation (FBI) is investigating as well.

Analysts at HSBC said it's difficult to quantify the impact of political uncertainty on the currency so far, but in a note earlier this week, they said, "politics will become more significant for the currency if policy risks and economic costs start to materialize," especially with ratings agencies monitoring government spending.

But HSBC also doesn't believe the ringgit's 1997 levels necessarily offer any signal on just how far the ringgit could fall.

"It is possible for dollar-ringgit to go into uncharted territory," the HSBC analysts said, something other emerging market currencies have already done. "This time around, the broad U.S. dollar is appreciating also on its own merits," while during the 1990s, the greenback's strength was largely due to emerging market weakness, it noted.

Brazil's real, for one, has touched an all-time low against the greenback amid steep drops in the prices of its commodities exports and a drop off in demand from major trading partner China as well as domestic political turmoil.

HSBC doesn't believe the ringgit has reached its worst-case scenario yet. The bank is concerned that prices of palm oil, which accounts for around 8 percent of Malaysia's exports, are falling. Palm oil sales are denominated in ringgit, meaning a weaker ringgit doesn't improve the country's trade figures.

The weaker ringgit may already be boosting inflation in the country. Credit Suisse noted August inflation came in at 3.1 percent on-year, above its forecast for 2.8 percent, largely due to higher food prices as the weaker currency affected import prices. The bank expects the U.S. dollar will be fetching 4.50 ringgit in three months. (cnbc)

China Could Dodge Fed Bullet, but Malaysia in the Firing Line

Malaysia needs to braced for a hit to growth

Janet Yellen, chair of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

When the U.S. Federal Reserve last week opted against its first rate hike in nine years, governments around Asia breathed a sigh of relief. But that relief could be short lived. 

While the region's biggest economy, China, can likely withstand any negative flow through whenever the Fed does eventually move, others, like Malaysia are braced for a hit to growth.

That's because a U.S. rate hike could accelerate declines in developing Asian currencies and in the process raise funding costs for firms and consumers, constraining demand and disrupting growth, according to HSBC Holdings Plc. The relationship is particularly dangerous in economies where consumption and investment is driven by debt and may be exacerbated when U.S. dollar interest rates begin to rise, it said. 

Take Malaysia, where credit to the non-financial private sector as a share of gross domestic product rose to 135 percent in the first quarter from 115 percent in the same period in 2009, data from the Bank for International Settlements show. The ratio is even higher in China, where it rose to 198 percent from 130 percent.

China's ``exchange rate adjustment in August, and resulting capital outflows, may have temporarily tightened financial conditions in the country,'' said Frederic Neumann, co-head of Asia Economics Research at HSBC. ``However, PBOC easing helped to blunt this effect and reinforced capital controls should ensure that there’s only a tenuous link between currency moves and funding conditions on the mainland.''

Yet, the People's Bank of China has cut interest rates five times since November and lowered the proportion of deposits banks have to set aside as reserves in a bid to boost lending and avert a further slowdown. 

The yuan has fallen about 2.6 percent against the U.S. dollar this year, compared with Malaysia's ringgit, which has dropped more than 18 percent against the greenback, the biggest loser among the 11 most-traded Asian currencies tracked by Bloomberg.

Malaysia's economy expanded the least in almost two years in the three months through June. Private consumption is expected to moderate as households continue to adjust to the implementation of a new consumption tax and the more uncertain economic environment, the central bank said in a Sept. 15 statement.

``Malaysia is among the most vulnerable given that it has seen among the biggest moves in the currency and it has a high debt-to-GDP ratio,'' said Neumann. ``That would make Malaysia likely to suffer a tightening of financial conditions which could impact growth over time.''

With Fed officials arguing an interest-rate increase is still warranted this year, emerging Asia's recovery may be a ways off. (bloomberg.com)

Balanced Investing for Balanced Living

In the market’s never-ending story, we never know how its most recent action will play out. One thing we do know is that when the market is more volatile than usual, investors who lack a personalized, long-term plan to guide their way are far more likely to make the wrong moves by the time the cycle is complete. In our opinion, every investor’s long-term plan should include embracing a buy, hold and rebalance approach to investing. This is one of the simplest and most effective ways to diversify and it may help you prosper in various financial markets over the long-term.

To achieve this goal, a portfolio is initially allocated based on each investor’s needs across different asset classes such as stocks, bonds and real estate. The portfolio mix is then maintained by periodically rebalancing. Winning investments are pared back and underperforming investments are increased during a rebalancing. A rebalancing can occur on a specific date, such as a birthday or anniversary, or it can be done using a percentage of asset method. See my book, All About Asset Allocation for a detailed discussion of rebalancing techniques.

Figure 1 is an illustration of rebalancing using a 50% stock and 50% bond allocation. When stocks gain versus bonds, their percentage or allocation becomes too large. Shares of the stock investment are sold and the proceeds are reallocated to bonds. This serves as a risk control mechanism for the portfolio.

Another effective way to rebalance is to employ new dollars when they are available. For example, if you were to receive a modest lump sum of cash, you could use it to “feed” the portion of your portfolio that requires additional assets. If you were underweighted in bonds, for example, you could apply the new dollars there. This helps you rebalance while minimizing the transaction costs involved.

Figure 1: Rebalancing a 50% stock and 50% bond portfolio

Some financial pundits criticize a balanced approach. They say a buy, hold and rebalance strategy is simple-minded and a relic of the past. Often, their solution is to be tactical, meaning they suggest that investors aggressively move in and out of the markets in an attempt to avoid the worst returns and capture the best ones. As it turns out, the data suggests that more than half the experts fail to time markets correctly; their portfolios are expected to fall short of the simple strategy they mock so much.

Figure 2: Comparing a 50/50 Bond/Stock Portfolio to Each Index

Source: CRSP and Barclays Capital data from DFA Returns Program, chart by R. Ferri.  

At least on paper, every stock investor lost portfolio value during the crushing bear market that began in October 2007. Prices were down nearly 60 percent from peak to trough. A 50 percent stock and 50 percent bond portfolio was down about 20 percent from the peak. Even a portfolio holding only 20 percent in stocks didn’t escape the bear and was down about 5 percent by the time the market hit bottom in March 2009.

Still, Figure 2 shows that the 50/50 diversified, rebalanced portfolio fared quite well during the bear market and the recovery that followed. The return hasn’t matched a 100 percent stock portfolio over the entire period, but the volatility was considerably lower – and volatility matters!

Investors who assume the party will never end and take on too much equity risk when markets are surging upward over extended periods run the risk of capitulating in the next bear market. They often lack a disciplined plan to see their way through, and may never fully recover the realized losses they incur after selling. Lower volatility created by a disciplined allocation to stocks and bonds helps keep you invested during all market conditions.

Ideally, our crystal ball could tell us to get out of stocks before the crisis, but realistically no one knows what the market is going to do in the future. We invest in stocks because in the long-term the returns are expected to be substantially better than bonds. We need this growth just to stay ahead of inflation and taxes. Patience is a virtue, though. Bear markets occur without warning; bull markets often follow on their heels with equal unpredictability. And so on, and so forth. Only those with discipline throughout can expect to build wealth according to a rational course, rather than depending on random and very fickle fortune to be their “guide.” (forbes)

How a Diversified Portfolio Can Mitigate Risk

Often times when I review a prospective client’s portfolio it’s heavily tilted toward U.S. equities and contains little to no internationally based stocks. 

Many of us will readily admit to having a hometown bias when it comes to our favorite sports teams; however, we may be unaware that these same biases carry over to our own investment philosophy. 

The reality is, many investors are selling themselves short by not fully utilizing the global equities market, often resulting in higher risk portfolios with lower returns. In fact since 1970; international stocks from developed regions have outperformed the U.S. stock market about half of the time.

The most common example of these “hometown” biases is in portfolios that are heavily invested in U.S. based, multinational corporations such as Apple, Exxon Mobil, or Coca-Cola. 

While it’s human nature for people to avoid things that are unfamiliar to them and take comfort in what they know, this can lead to a false sense of security. The brand recognition of these conglomerates, along with their international presence, leads investors into thinking that they don’t need to diversify their portfolios with any international stock. 

In truth, while they are gaining some international exposure, it is very limited and lacks exposure to major asset classes such as small-cap and emerging markets.

Academic research has shown that investors have better outcomes when their portfolios are diversified among different asset classes because each responds differently to various market cycles and events. Although international funds are historically more volatile than similar domestic funds, adding international funds to a portfolio can provide greater diversification while potentially lowering the volatility of the entire portfolio. 

By seeking investments that are not highly correlated with one another you are increasing the potential for gains in one part of your portfolio to offset losses in another part. In other words, a well balanced portfolio with international exposure can help to reduce large swings and keep you cruising in the center lane of performance.

Diversification aside, international markets offer growth opportunities that the United States simply cannot compete with. International economies, benefiting from less mature markets, attractive demographics, and availability of natural resources are growing at higher rates than developed-market economies. 

In the last 15 years international emerging market stocks have outperformed the S&P 500 10 times. In fact, over that same period the Morgan Stanley Capital International Index has been the top performing major asset class seven times, with an average return of nearly 13 percent. This is not to say that international stocks are not without risk, but an investor without any international exposure over that time period would have missed out on a tremendous opportunity to grow their portfolio.

Most of us are unaware that the United States accounts for just over half of the global equity market. However, if recent trends continue the international equity markets will gain the majority of the market share before long. So before you purchase your next stock or equity fund, remember that investing internationally can help to diversify your portfolio, mitigate risk, and maybe even increase your return. (littleton)

Successful Investing is A Process

5 secrets of successful investing

There is a huge financial services industry dedicated to helping you manage your money. But the real secrets of successful investing and wealth creation are so simple that you shouldn't be overwhelmed by all the choices being offered. Instead, start with one small principle:

The secret of financial success is to make your money work for you as hard as you work for it over time!

Once you understand the importance of that basic concept it's easy to get started with a small amount of money. But the success of this strategy is only revealed over time. And that leads to the first of the success secrets:

1. Put time on your side. Like gravity, time is a powerful force of nature. It can leverage your plan to grow wealth, even starting with a small amount of money. For example, if you invested $2,000 today on an individual retirement account (IRA) in a stock market index fund, reinvesting all dividends, based on historic average market returns -- in 30 years the account would be worth $45,000. That may not sound like a lot of money, but it leads us to the second secret.

2. Invest regularly. In the example above, it hardly seems worthwhile to wait so long for such a seemingly small return. But what if you invested that same $2,000 every year, for the next 30 years? The account would total nearly $400,000! (Now, do the math and figure the results if you invested $5,500 every year -- the amount currently allowed in an IRA annually for those under age 50!)

3. Don't try to "beat" the market. In 2014, according to Morningstar, 86 percent of mutual fund managers failed to beat their benchmark. Those are trained professionals who devote full time to picking stocks! I have nothing against stock trading for those who see it as sport. But for long-term wealth creation, you don't have to beat the market. Just being there is enough. Remember, since 1926, there has never been a 20-year period in which you would have lost money in a diversified portfolio of large-company American stocks, with dividends reinvested, even adjusted for inflation.

4. Exercise self-discipline. Remember your time horizon. If you are investing for the long run, then don't let short-term headlines scare you out of your investment plan. A market decline becomes an opportunity for your regular retirement plan contributions to buy more shares of the fund at lower prices -- the exact recipe for success. Even those closer to retirement need a portion of their funds invested for long-term growth to beat inflation.

5. Be optimistic! Surely, some have read this far shaking their heads in worry about our nation's problems. But think of the problems we have overcome in the past 75 years -- wars, inflation, the Depression, recessions, financial crises in the S&L and mortgage industries, as well as multiple bear markets. Yet, through it all, the strategy of regular investing in a diversified portfolio has worked in every 20-year period.

It's easy to make excuses for not starting out on the road to investment success, or for taking a detour along the way. Many of these are lessons only understood in hindsight.

So, if it's too late for you, pass this on to a young person who can take advantage of time leveraging small amounts of money. One day they'll be grateful. And that's The Savage Truth! (chicagotribune)

Who Will Benefit from RM20 Billion Pumped Into Economy?

Consumers are tightening their belts in the face of a shrinking ringgit resulting in higher prices for most goods and services. Putrajaya has announced special measures to boost the economy but economists ask if funds are misdirected. – The Malaysian Insider file pic, September 21, 2015.

Malaysians will continue to feel the pinch of higher prices for household goods and food even as Putrajaya rolls out special measures to cushion the impact of a weak ringgit and turbulent global economy on the country.

Economists The Malaysian Insider spoke to were also sceptical of the positive effects of these measures for manufacturers, who are facing higher costs as a weak ringgit makes their imported raw materials and equipment more expensive.

Despite the fact that the stock market responded positively to these special measures, some also questioned the wisdom of reactivating ValueCap, a government investor whose role is to support undervalued stocks.

Just like increasing Kedai Rakyat 1Malaysia (KR1M) outlets, such a move could lead to government intervention to prop up non-competitive companies while preventing legitimate smaller firms from growing, said the economists.
There was also the question of credibility, said Institut Rakyat’s Yin Shao Loong.

“These proposals are coming from the man responsible for Malaysia’s biggest financial scandal, 1Malaysia Development Berhad (1MDB) that remains unresolved to this day and continues to be a burden on the economy.”

Boosting value   

Prime Minister Datuk Seri Najib Razak announced the special measures on September 14. The next day, the local stock market charted one of its biggest single-day gains as the business community responded to these measures, especially restarting ValueCap with RM20 billion.

Independent economist Azrul Azwar Ahmad Tajuddin said ValueCap could bolster investor confidence and woo more foreigners back into the local stock market.

“Apart from bolstering market and investor confidence in general, resilient asset prices in the capital market, especially equities, could also provide a positive spark for consumer sentiment,” Azrul told The Malaysian Insider.

Although economists from the Penang Institute agreed with this assessment, they said such government intervention in the market was risky if the RM20 billion was misdirected.

“There is a risk that inefficiently run companies are artificially propped up by the government, thus preventing new entrants from setting up which is a natural process required in rejuvenating businesses,” said a statement from the institute’s top economic experts, Dr Lim Kim-Hwa, who heads the economics unit, senior executive officer Tim Niklas Schoepp, and senior analysts Dr Lim Chee Han and Ong Wooi Leng.

Worse, said Yin, was the prospect of ValueCap bailing out non-performing companies with crony links. 

Cash strapped   

Another main target of the special measures was helping companies and consumers deal with higher prices from imports because of a weak ringgit.

These included import duty exemptions on a variety of products and increasing low-price stores such as KR1M, Kedai Kain 1Malaysia and Kedai Buku 1Malaysia.

These outlets allowed low- to middle-income groups to get goods and services at affordable prices, said Azrul, but questions remained about their quality and whether they actually curbed inflation.

The fact was few Malaysians used them and not many of their goods go towards calculating the inflation rate via the consumer price index, he said.

“(KR1M) is targeted at the lower-income segment of society. (They) might not address the pressure of higher cost of living faced by many middle-income groups,” said the Penang Institute.

“Besides, with KR1M, the government has become a retailer of goods, in direct competition with other private sector retailers.”

Azrul also said import duty exceptions should be specific to only export-oriented industries which were hurt by the ringgit slide, such as producers of electrical and electronics products, and rubber gloves.

Yin of Institute Rakyat said the government also needed to deal with how the goods and services tax (GST) has created cash flow problems for small and medium companies that were already battered by pricier imported materials.

“At the moment, GST is disproportionately punishing the SME sector which lacks the revenue to sustain GST compliance and payments. The government should respond to calls for a moratorium and review on the GST.”

Who does the money really help?

Although a weaker ringgit would be a tourism boon, the Penang Institute economists were critical of how Putrajaya was spending money to help the sector by focusing on mega-projects, such as the Desaru Coast Destination Resort in Johor.

The funds for the project could be better spread throughout other popular tourist destinations, such as in Sabah and Penang, it said.

“Spreading the funding to more tourist attractions throughout the country will increase the breadth and depth of Malaysia’s attractiveness, thus catering to more tourists.”

Benefits from mega-projects, said Azrul, took longer to be realised and would not raise tourism revenue in the short or medium term.

“Scarce resources could better be used to promote and strengthen Malaysia’s appeal as the destination for health tourism, eco-tourism, agro tourism, edu-tourism, shopping and MICE activities.”

Pouring so much attention and funds into one project when the aim was to help the economy as a whole was also suspicious, said Yin.

“(I) would like to know why Desaru of all locales has been singled out for preferential investment? Who stands to profit from this? This creates the worrying impression that a national economic recovery plan is being diluted with service to vested interests.” –  September 21, 2015. (themalaysianinsider)

Malaysia: 1MDB scandal, Fed Fears Affecting Ringgit

– Central Bank governor says poor performance of Malaysian currency due to lack of Fed interest rates hike and domestic political scandal

By P Prem Kumar

KUALA LUMPUR   – Malaysia’s Central Bank Governor has blamed the Ringgit’s continued poor performance on uncertainty stemming from a potential interest rate hike by the U.S. Federal Reserve, and state owned 1Malaysia Development Berhad (1MDB) controversies.

Zeti Akhtar Aziz said current ambiguity over how long the Fed will maintain zero-bound interest rates is generating volatility, as economies across the world continue to grapple with the Fed’s “extreme and unprecedented measures”.

“However, their window of opportunity to raise [interest] rates has closed for the moment due to [global] uncertainty, and they didn’t want to generate more instability,” she told reporters at an economics update panel session in Kuala Lumpur on Monday.

The Ringgit — the worst-performing Asian currency this year — has been hit by falling oil prices as well as increased instability in the domestic and international environment.

Aziz, globally known as the guarantor of Malaysia’s financial stability, said the ongoing 1MDB controversies were also impacting the Ringgit, since they have hit the image of the currency.

Allegations of graft and financial mismanagement have dogged state fund 1Malaysia Development Bhd (1MDB), which is $11 billion in debt.

“We do not need another scandal. We do not need political uncertainty. All issues pertaining to 1MDB should be resolved. It is only then we can see the ringgit rebound,” she said.

However, she also claimed that ongoing probes into the financial situation of 1MDB — Prime Minister Najib Razak’s brainchild — will resolve the uncertainty.

“[Ongoing investigations] are going to yield an outcome. But for that to happen, we must wait,” she said.

A fortnight ago, the Ringgit hit 4.3405 against the dollar — a 17-year low — as the greenback strengthened against most Asian currencies.

It was trading at 4.2460 Monday.

BNM Foreign Reserves Up at US$95.3b

KUALA LUMPUR, Sept 22, 2015:

The international reserves of Bank Negara Malaysia (BNM) amounted to RM360.1 billion – equivalent to US$95.3 billion as at Sept 15.

In a statement, BNM said: “The reserves position is sufficient to finance 7.3 months of retained imports and is 1.1 times the short-term external debt.”
The latest reserves position for BNM is slightly higher compared to RM357.7 billion or US$94.7 billion as at Aug 28.

Meanwhile, Bernama reported that the ringgit ended lower today on broad US dollar strength as players still placed odds of a US Federal Reserve rate hike this year on the table.

At 5pm, the ringgit was quoted at 4.2940/2980 to the US dollar from 4.2650/2720 at yesterday’s close.

“All gains garnered Friday post-Fed’s Open Market Committee (FOMC) announcement were wiped out. A number of Fed officials reiterated a rate hike this year remains probable.

“Technically, there is a likelihood for a move to 4.3005,” Hong Leong Bank Research said.

The local unit fell against major peers except with the euro, but firmed up against the euro to 4.8080/8133 from 4.8182/8278 yesterday.

It declined against the Singapore dollar to 3.0331/0364 from 3.0289/0343 yesterday, traded lower against the yen at 3.5801/5850 from 3.5438/5511, and weakened against the pound sterling to 6.6463/6550 from 6.6218/6344.

Why Do Experts Advise People to Diversify Their Investments?

Who doesn’t like that rush of adrenaline when you make a big bet and it pays off? Level-headed investors, that’s who.

In real life, outside of the overly air-conditioned, alcohol-infused cocoon of a casino, concentrating your investment money on a single stock, sector or asset class is just the same as gambling. Sure, you get the same rush when your chosen investment goes on a tear. But if it goes the other way, if the marble lands on red and you bet the farm on black, it’s not just your discretionary money on the line. It’s your entire portfolio.

When seasoned investors see one of their investments skyrocket, be it a single stock, a mutual fund, or a concentration of investments in a particular sector, the celebration is subtle and short-lived. Similarly, when something in their portfolio goes into a death spiral, the mourning period is also brief.

That’s because they manage their portfolios in a way that ensures that if one of their holdings starts moving in a direction they didn’t anticipate, the results are not financially devastating. They’ve got other investments in the portfolio to counterbalance that loss. In other words, they’re properly diversified.

Balance Your Returns

Diversification helps smooth your returns over time. The act of diversifying simply means placing lots of bets on different kinds of investments to ensure that your portfolio isn’t too tied into the success or failure of any single investment, asset class or style.

You’ve heard the whole “don’t put all your eggs in one basket” slogan. Well, to continue our Vegas metaphor, it’s better for your overall long-term returns and near-term digestive system to put your poker chips in many baskets. When you are properly diversified and one type of investment tanks, there’s another investment that soars and keeps the balance.


Read: Here’s Why You Should Start Investing Now

What if the mix of assets gets thrown dramatically out of whack? The smart investor wastes no time righting the ship by stepping back to calmly assess the overall mix of investments and then strategically moving money around to rebalance the portfolio.

On average, a portfolio should be rebalanced four to six times per year. However, if your portfolio isn’t rebalanced regularly, diversification will become less effective.

Stay in the Game

When faced with seismic events in our portfolios, most investors have a very human and very understandable reaction: They hit the panic button.

This panic triggers some pretty self-destructive behaviors, such as selling off the investment, triggering taxes and fees, or giving up on investing altogether and shoving their savings in a low-interest savings account.

Related: 6 Things Warren Buffett Says You Should Do With Your Money in 2015

Perhaps even more dangerous to your long-term returns are the gradual drifts that make your portfolio grow or shrink unevenly. Then one day, when you bother to look, you’re shocked to see that 25 percent of the value of your portfolio is concentrated in a sequin manufacturing company based in Greece.

To protect yourself from seismic events or gradual shifts (or a sudden sell-off of sequined garments), it’s important to review your portfolio at least quarterly to see if anything has been thrown out of balance.

There are two sure-fire ways to know when it’s time to re-balance:

• When your assets drift outside their target allocation. You want to ensure that the investing plan you originally put in place is still intact and positioned to deliver steady long-term gains.
• When life events alter your investment profile, risk tolerance, or you’re going to need the cash for a near-term expense. The closer you get to the point when you need the cash, say for retirement income, college costs or a big expense like a down payment on a home, the more money you need to move into safer havens such as bonds or cash equivalents.

Five Ways to Get Diversified

These are factors that the pros use to measure a portfolio’s true diversity:

1. Asset Classes

Stocks, bonds and cash alternatives are the three main asset classes. Real estate and commodities, like gold and coal, are sometimes included. The biggest difference between them is volatility, or risk levels, determined by how much exposure each has to forces that affect the returns they earn. While stocks typically carry the most risk, they offer the greatest growth potential. Because bonds are less volatile, their returns are not as great but they can provide helpful stability in turbulent times. Cash alternatives carry the least amount of risk and therefore deliver the lowest returns.

2.  Industry Sectors

Firms are grouped into different sectors of the economy such as technology, manufacturing, pharmaceutical and utility companies. There are different ways to invest in different industries: buying stock in an individual company that operates in that industry; buying a mutual fund made up of many companies in a particular sector; or buying an exchange-traded fund (ETF) that, like a mutual fund, concentrates its holdings on a narrow sector of the stock market.

3. Market Capitalization

This is the total value the market places on a company and its assets. Firms are considered to be large-cap, mid-cap or small-cap, based on the dollar value of their outstanding shares of stock. Certain characteristics are typically assigned to stocks in one market cap category or another. So depending on your investment objectives, you might be drawn to invest in one of the categories over the others, or, better yet, invest a portion in each.

4. Investment Styles

Wall Street often classifies stocks as value or growth. When a mutual fund indicates that it is a growth fund, that means that it invests in companies that the fund managers believe will grow faster than average. Value funds, on the other hand, seek to invest in businesses that are fundamentally sound, but that fund managers believe are trading at a lower price that does not reflect the company’s true worth.

5. Geographic Areas

The U.S. isn’t the only game in town open to investment. Just as you don’t want to be overly dependent on a particular sector’s performance, the same goes for any single country. Investing in companies, funds or ETFs that concentrate on business in different geographic regions reduces the risks associated with exposure to external factors like economic instability, natural disasters and civil unrest.


If you haven’t taken a look at your portfolio through the lens of diversification lately, it’s time. If you find that your cocktail of investments hasn’t been shaken since you last checked, then you can sleep better at night knowing that your investing plan has not veered off course.

Source - gobankingrates

China's Offshore Investment Accelerated. See What Kind of Assets China Accumulates in Overseas!

China on track to book $1 trillion in total offshore investment by end-2015

China's outbound direct investment (ODI )is expected to surpass $1 trillion for the first time in 2015, as slowing economic growth and rising internationalisation of Chinese business see more local companies investing overseas.

Total direct investment offshore increased to just under $883 billion in 2014, Zhang Xiangchen, Deputy China International Trade Representative at the Ministry of Commerce (Mofcom), said on Thursday.

The commerce ministry on Wednesday reported that non-financial outbound direct investment rose 18.2 percent to 473.4 billion yuan, or $77 billion, for the first eight months of the year.

Mofcom on Thursday also revised up its 2014 offshore non-financial direct investment tally to $107.2 billion from the $102.9 billion reported previously, taking total outward investment for the year to $123.12 billion.

"Our outbound investment has maintained a double-digit growth rate, and this trend will be sustained in future," Zhang told a media briefing.

China's slowing economy and market volatility is driving domestic firms to acquire foreign brands and technology, as well as diversifying, said Thilo Hanesmann, Research Director at Rhodium Group in New York.

The Beijing government has rolled out policies to support the global efforts of Chinese companies, offering financial incentives and removing administrative controls on offshore deals.

Chinese firms have already announced or completed 390 deals worth $77 billion in the year to Sept 16, according to Thomson Reuters data, a doubling of the deal amount for the same period last year.

China's global M&A deal volume this year already surpasses the $70.4 billion in deals reached in 2008, formerly the biggest year so far for offshore mergers.

Industrial deals were the biggest transactions, led by China National Chemical Corp's buyout of Italian tyre-maker Pirelli & C Spa for $8.88 billion, which included Pirelli's debt.

Many of this year's big-ticket deals were done by Chinese firms buying financial services businesses, including HNA Group Co's subsidiary Bohai Leasing Co, which paid $2.56 billion for aviation leasing firm Avolon Holdings Ltd.

By the end of 2014, 18,500 Chinese domestic investors had established nearly 30,000 enterprises overseas, with about 77 percent showing profits in 2014, Zhang said.

"State-owned firms and private companies are looking to buy overseas financial institutions that are yielding strong cash-flow and providing an international presence and market share," said Eugene Qian, China country head for UBS Ltd. (reuters)