Cash – is it still king?

PETALING JAYA: The term “cash is king” – which suggests investors conserve cash for rainy days – has prevailed during times of market volatility and uncertainty before, but in the wake of the declining ringgit, the phrase rings hollow.
The beleaguered currency, which has weakened 3% year to date against the US dollar, started to stabilise after a raft of measures introduced by Bank Negara Malaysia. The ringgit traded at 4.425 to the US dollar as at 5pm last Friday.
“If the cash is in ringgit, then it is not exactly cash is king,” said Whitman Independent Advisors Sdn Bhd founder and managing director Yap Ming Hui, who believes the movement of the ringgit is still unpredictable.
Given that the ringgit continues to be undervalued, the market could be seeing a rising trend for investments in foreign currency-denominated assets as a continuing decline in the ringgit’s value could offset gains from investments.
“Let’s say you invest in a Malaysian equity fund; you may make a 10% return, but if the currency weakens by 4%, then your actual investment return will also drop,” Yap told SunBiz.
Things are even worse for those who rely on bank deposits to grow their wealth.
“If you put money in the bank, you are the worst hit given that the interest rate is only about 3.5% but as the ringgit has dropped about 3.5% year to date, you are not making any money, your interest rate is zero. Don’t forget you have another 3% of inflation, so your return is shrinking, that’s the part hardest hit,” he said.
On this, Yap recommends investors diversify their portfolios by allocating at least 20% in foreign markets to mitigate risks of a weaker ringgit. “Even before the sharp fall in the ringgit, we always advise clients to invest 20% or more in foreign currency assets,” he said.
For a start, he said, one can invest in unit trusts that have overseas exposure, which provide a certain degree of comfort, before going into the stock markets abroad. “Unit trust investment is good for beginners. It could be Malaysian unit trust funds but with exposure in overseas markets like the US and Europe.”
Nonetheless, Yap admitted that investors do express their concerns over the difficulty in investing in foreign currency assets with fewer signs of rebound in sight for the ringgit.
“It’s hard for them. They hope that maybe they will do it when the ringgit strengthens a bit to RM4. But from my experience it seldom happens because when the ringgit strengthens to RM4, then the people won’t do it,” he said.
To mitigate the risks from exposure in foreign currency assets, Yap said, proper planning with good knowledge is needed to invest abroad.
“Education is very important as the financial and investment markets have become more complicated. Yes, it is risky to investment overseas, but we all need to learn. Slowly if the person feels comfortable, then he can move on with other investments such as the stock market,” he opined.
A weaker ringgit has also led to higher education costs for those who have children studying overseas. “If the parents have done proper planning, they would have changed the money into the relevant currency,” Yap said.
In view of the uncertainty in the world economy, he noted that it is very important for everyone to take a serious look at their financial position. “They need to do a proper assessment before committing to big-ticket items like cars and properties and they have to prepare for rainy days with a diversified investment portfolio,” he added.