Investing abroad?

With the recent de-regularisation or another word, liberalisation of capital markets in Malaysia, there are many opportunities available for Malaysians to invest abroad.

Why invest abroad?

This is the text book answers on reasons to invest abroad.

There are many reasons for one to invest overseas. Many sided that Malaysia’s stock markets offer limited choices and that the shareholdings are highly concentrated in few hands. Overseas markets provide liquidity and volatilities for savvy investors to maximise their return.

Some markets move in opposite directions of Malaysia’s markets. It provides opportunities of spreading the investing risks.

What are the channels available for us to invest in overseas stock market?

Generally, there are four channels...more.


Foreign exchange fluctuation

If you invest in overseas stock markets you can gain or loss in three ways, i.e. stock prices fluctuation, dividend income and foreign exchange fluctuation.

Let's start with a very simple explanation.

Should RM strengthen against other currencies, you lose. Should RM weaken against other currencies, you gain. So if you invest in overseas stocks you will want RM to get weaker in time to come. The problem is: market consensus is the opposite.

We must remember that there is still an upward pressure on RM against USD. Despite short term stability of RM against USD, it is expected that RM will strengthen gradually. Such movement is inevitable as long as US current account deficit problem is not resolved.

And it will not resolve. Frankly, at this point of time the only way to have this resolves is to reduce U.S. consumptions (dream on), get more foreign investments to U.S. and/or allow USD to depreciate.

If you invest in US stock, you subject yourself to a highly probable situation of foreign exchange (forex) losses. You need a very high investing gain to offset the "almost certain forex losses". If you invest in a fund that invests overseas, the fund manager must really have a good investing gain to offset the "almost certain forex loss".

We are not really neutral at other overseas investing opportunities either, i.e. Europe, Japan, China, etc. because we believe RM is undervalued and RM will strengthen eventually.

But RM is not strengthening and doesn't seems to move up further? You ask.
It is reasonable to suspect Bank Negara Malaysia (BNM) intervenes the trading of RM preventing it from strengthening in order to provide stability and to protect our exporters. There is nothing wrong about it. However, we must know BNM will not do it forever. BNM may want to smoothen out the transition from fixed rate regime to managed float regime. But ultimately market force is not to be defied though can be delayed.

Therefore if you invest overseas, you really must have a very good investing gain to offset the very likely forex loss.

Our local fund managers

Investing abroad is a fairly new subject even to our local fund managers. BNM controlled our local funds tightly from investing abroad for many years. Most of our home grown local fund managers do not have sufficient experience to invest in overseas markets. Yes, they will learn and some will turn out to be great eventually. But why risks your money now?

Conclusion

Stock performance is not known yet forex loss is almost certain. Investing overseas? Buy funds invest overseas? Not at this point of time. Not until RM is strengthen to at least at the expected range of 3.50-3.60 against green back (USD lah).

Coupled with fund manger experience, and their water testing in such new and untapped area, why risk your money?

High risk high return? Hardly. HRHR works only if the odds is to your favour. With an almost certain loser, why risk? (in a more technical term Sharpe ratio is way too low.) Come on, do a good financial planning.

In fact it is probably the other way round. With current lukewarm market sentiment and an expected strengthen of RM, this is actually the best time for foreigners to invest in Malaysia stocks. (Ok, they may have too much things to worry about, like oil prices...) May be we all should still keep our money in RM for a while.

And of course, don't blame...

Forecasting forex trend is a crystal ball gazing game. I can be outright wrong. Just like Professor Trelawney, my guess on currency exchange trend could be as good as her prediction of Harry Potter's fate. This is a disclaimer. :-)

Sometime I do wish investing and financial planning are exact science.

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