Many Singaporeans view Malaysia as a beautiful and inexpensive holiday destination whenever we are able to steal a few days away from work. From cheap shopping in Johor Bahru, numerous island paradises scattered across its coastlines to its wildlife, the tallest peak of Mount Kinabalu, its bustling capital in Kuala Lumpur and of course, its free-to-enter casinos in Genting, Malaysia offers Singaporeans a way to forget our worries and stress. At least for awhile.
How Malaysia Impacts Singapore
More importantly though is how closely both our economies are intertwined – being geographically tied and significant trading partners of one another. Malaysia’s economy is also the third largest in ASEAN and has a population close to six times larger than Singapore. If its economy does not power ahead, it may spell disaster for Singapore in the long run.
What all this means is that anything that happens in Malaysia will ultimately impact Singapore and its people.
This includes the 1MDB scandal which led to tightening compliance requirements in Singapore as well as the closure of several private banks, its decisions to impose a tourist tax and increase tolls for Singaporean vehicles, developing Iskandar to replicate Singapore’s success, building infrastructure such as its Tanjong Pelapas Port to compete with Singaporean shipyards, investing in RAPID project to take Jurong Island’s business as well as its natural disasters when the Tsunami hit its north coast in 2004 and when an earthquake struck Mt Kinabalu in 2015, killing 18 people 10 of whom were Singaporeans.
This also includes its depreciating Ringgit, which has lost close to 25% against the Singapore Dollar in the past five years. While many people from both sides of the causeway joke about this, it has real implications for many people including close to 400,000 Malaysian workers in Singapore who are benefitting as well as Singaporean investors in Malaysia, who may have suffered.
What The Declining Ringgit Means For Singapore Investors
For Malaysia’s stock market, its benchmark KLCI (Kuala Lumpur Composite Index), made up of the top 30 stocks listed in the country, has climbed close to 13.5% in the past five years. While this pales in comparison to the 25% its currency lost, this calculation does not take into consideration any dividends it paid out during the five years.
Based on current prices, it has a dividend yield of 3.1% per annum. This roughly translates to over 15.5% total returns during the past five years. If you include this into the calculation, you would have earned 29.0% in the past five years, or a 4.0% return if you convert to Singapore dollars.
In contrast, if you had invested into the STI (Straits Times Index), made up of the top 30 stocks in Singapore, in the past five years, you would be looking at a price appreciation of 7.9%. This is already better than the 4.0% you would have made investing into the KLCI.
Taking dividends of STI stocks, which pays about 3.4% per annum, into consideration, you would have a total return of close to 24.9%. This is 20.9% more than if you had invested into the KLCI.
Of course, making individual investments into companies may have brought about different results, but this is a broad-based calculation of likely returns Singaporean investors would have earned.
What We Need To Consider When Making Investments Overseas
The above example highlights the importance of foreign currency movements to investors. Despite the KLCI returning 29.0% compared to the STI returned 24.9%, it turns out the investment in the STI would have been far superior because of the depreciation in Malaysia’s Ringgit. This applies to all other types of investments including property in Malaysia’s Iskandar region and bonds offering higher yields as well.
As investors, we must know the risks we are taking when we invest outside of Singapore. This should apply to any country, and not just Malaysia. While investors in the US stock market may have enjoyed its currency appreciation against the Singapore dollar in the past five years, they may still take a hit from foreign exchange depreciation if they had invested in the US market 10 years ago when the US Dollar was trading at S$1.54.
Singaporean investors need to ensure they know what they are getting into before they invest into foreign markets.
Beyond foreign exchange risks, there are other key considerations you need to understand when investing overseas as well, this includes other forms of risks such as political risks, liquidity risks and credit risks. You should also be aware of the counterparty you are dealing with. Always do your due diligence and ensure you are working with a trusted entity.