One of the pitfalls in limiting investments to assets denominated in your domestic currency is the risk of that 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 if you’re heavily invested in assets denominated in the Malaysian ringgit, Japanese yen and the renminbi in Asia.
Take the ringgit, for example. The Malaysian currency 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.
In fact, 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, with the ringgit now 4.29 versus the USD, up from 4.48 at the start of 2017.
Of more importance though, is whether the ringgit’s recovery is sustainable. On one hand, things appear to have stabilised on the back of support from Bank Negara Malaysia.
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.
That means the ringgit is likely to remain volatile moving forward, posing higher risks to ringgit-base investors. Meanwhile, volatility can also be expected from the yen, which tends to defy forecasts on its direction. For example, the yen has strengthened against the USD despite the Federal Reserve’s well-communicated intention of raising interest rates. It is now 112.42 compared to 116.79 at the start of the year.
The RMB, too, is expected to be volatile. One reason is capital outflows. At its discretion, China’s central bank also sets the midpoint around which the currency can move 1% in either direction, making the RMB less predictable than others.
Investors should look offshore for better investment opportunities
To hedge against that volatility and reap better value, investors should consider exploring offshore investments.
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 offshore and based in the USD.
The British pound has also appreciated this year. The currency recently jumped against the USD and other currencies after Mark Carney, governor of the Bank of England, hinted that interest rates in the UK are ripe for a raise.
The bottomline is not to restrict your investments to the domestic currency and market. Instead, look offshore, and “allocate your money to the best place globally” that offers better value and superior returns.