Merge RHB | Going global in foreign currencies

Like all investments, too high an exposure in one country or one asset class may subject the portfolio to high concentration risk, especially when the particular country or asset class is in trouble. Similarly, too high an exposure to one currency is also not ideal, especially in the current environment of expected higher currency volatility.

It does not help that most investors across the world demonstrate a home bias, which means that they are investing more in their home countries due to lack of familiarity. Such investors will be exposed to currency risk if their home currencies depreciate signiﬁcantly as their ﬁnancial needs are denominated in foreign currencies, as witnessed in the ringgit volatility from July 2014 to December 2016 (see Chart 1).

To mitigate this risk, they should have a well-diversiﬁed portfolio consisting of assets denominated in major currencies, says the RHB Wealth Research team. According to the team, diversiﬁcation in foreign currencies and assets not only serves as a natural hedge but also a cost-free solution to help investors protect their returns on their overall portfolios.

Besides, investors who wish to have an exposure in foreign assets but do not want to be exposed to foreign exchange (FX) risk can consider investing in products that are fully or partially hedged against currency exposure.

A global solution

Currency volatility has calmed down in the first half of 2018, diverging from the rising CBOE Volatility Index, which represents volatility in the equity market (see Chart 2). However, investors should be aware that volatility in the FX space may increase in the coming months as central banks in major countries are likely to change their stance when the economic outlook improves, and this has the tendency to result in volatility in equities.

The US Federal Reserve (Fed) has continued in its rate hike path, which began in 2015, and other major central banks, such as the Bank of England (BoE), Reserve Bank of Australia and European Central Bank (ECB), may follow suit. This may cause countries with budget deﬁcits — especially the emerging markets — to face strong headwinds as it may lead to a rating downgrade and subject the countries’ currencies to higher volatility.

here are many products that investors can look at to diversify their portfolios in major foreign currencies. These include unit trusts, retail bonds and structured products that cater for the investor’s needs. With an array of investment products denominated in major currencies such as the ringgit, US dollar, Australian dollar and Singapore dollar, investors can turn to RHB to achieve a true diversiﬁcation.

Currency outlook for 2H2018

After six years of upswing, the US dollar has slipped 10% from its peak (December 2016 to January 2018), measured by a US dollar index benchmarked against a basket of major currencies. Despite strong economic news such as full employment, encouraging wage growth and rising inﬂation, the bull in the greenback may not be back anytime soon and the US dollar is expected to stay range-bound going forward.

On the other hand, the euro — one of the best performing currencies in developed markets last year — is likely to edge higher this year. This is in line with the expectation that the ECB is likely to shift its tone from neutral to hawkish, where the central banker starts assessing signs of stronger inﬂation in German’s Consumer Price Index, which grew at 2.2% in May on an annualised basis. The euro will also be supported by a solid European Union account surplus and the strong employment market. The recent correction, which sent the euro/US dollar to the 1.15 level, may be attractive and it is expected to end the year higher.

In close proximity to the euro, the British pound is also seeing some upside momentum, having climbed to its highest level in mid-April since Brexit. Market participants are now less worried about the progress of Brexit after the deadline was extended to 2020 and positive outcomes were achieved from the negotiations. The market is now repricing a slightly hawkish BoE, further easing concerns about Brexit. While staying vigilant on Brexit, the RHB Wealth Research team is tactically bullish on the pound sterling in the short to medium term.

The ringgit was one of the best performing currencies in Asia last year, but it slipped against major currencies as investors shied away due to uncertainties after the May 9 general election. The newly elected government is making efforts to enhance the long-term ﬁnancial stability of the country at the expense of a few mega projects and rationalise its expenses.

As a result, government expenditure may be reduced and GDP growth may soften in the near term, the same goes with our currency. In the long run, the ringgit will remain resilient at its fair value of 3.70 to 3.90 against the US dollar with stronger oil prices, an improving budget deﬁcit and an inﬂow of foreign funds. The oil prices have fully reﬂected on the US’ withdrawal from the Iranian nuclear deal and are poised to rally once the correction is over.

Looking at the smart money ﬂowing into Japanese equities, foreign investors are reducing their hedge in the yen, which means that they are increasing their long yen exposure. The rosy yen outlook is mainly due to it being one of the cheapest currencies currently, from a fundamental equilibrium valuation perspective. The Bank of Japan is also downsizing its quantitative easing, which may present a case for a higher yen going forward, encouraging more investors to increase their exposure to the currency.

While the furious trading of threats between the US and China over trade tariffs has weighed on the equity and credit markets, it has yet to spill over to the FX space. The market is still unsure on the outcome of the trade war as the situation has not improved and there are frequent ﬂip-ﬂopping by the Trump administration. However, both parties are expected to avoid the extreme scenario that will bring negative economic and market impacts. If the negotiations go well, the renminbi is expected to continue in its gradual appreciation path.

To better manage your foreign currency investment portfolio, RHB is offering investment products denominated in local and foreign currencies, allowing you to lower your currency ﬂuctuation risk while achieving your investment goals.

As the market is, in general, expecting an uptick in inﬂation this year, investors can also turn to gold as a safe haven hedging tool. The precious metal has always played an important role in the monetary system since ancient times, and is referred to as a currency and a commodity.

Start building your wealth with us to meet your financial goals, life stages and risk appetite today.

FIND OUT NOW

Enjoy high returns of up to 2.50% p.a.* with RHB Premier Current Account

FIND OUT NOW

Don’t miss out the latest Wealth Insights

READ

Up to 8X Loyalty Points* when you spend with RHB Premier Infinite Visa Credit Card

FIND OUT NOW

1 Debit Card, 33 Foreign Currencies Transact with no currency conversion fee with RHB Premier Multi Currency Visa Debit Card

FIND OUT NOW

Start banking on the go securely at your convenience

FIND OUT NOW

Enjoy 2.40% p.a.* with Junior Savings Account. It’s never too early for your children to learn savings

FIND OUT NOW

This publication has been prepared by RHB Bank Berhad and is solely for your information only. It may not be copied, published, circulated, reproduced or distributed in whole or part to any person without the prior written consent of RHB Bank Berhad. In preparing this article, RHB Bank Berhad has relied upon and assumed the accuracy and completeness of all information available from public references and articles or which was otherwise reviewed by RHB Bank Berhad. Accordingly, whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness or fairness of such opinions and make no representation or warranty (whether expressed or implied) and accept no responsibility or liability for its accuracy or completeness. You should not act on the information contained in this article without first independently verifying its contents.

Any opinion, historical account, personal profile, estimate or data contained in this article is based on information available as of the date of this article and are subject to change without notice. It does not constitute any advice, offer or solicitation by RHB Bank Berhad. This document and its contents are not intended to constitute an offer for sale and/or invitation to subscribe for or purchase or otherwise acquire any of the instruments referred to herein.

Disclaimer for Video and Podcast by RHB Asset Management:

The podcast provided herein is solely for information purposes only. It does not take into account the specific investment objectives, financial situations or particular needs of any particular person.

This podcast does not constitute an offer, solicitation or recommendation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy. Information contained in the podcast should not be relied upon when making investment decisions. You should seek independent legal or tax advice before making any investment decisions. Investments are subject to investment risks, including the possible loss of the principal amount invested. Value of the investments and the income, if any, may fall or rise.

No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein and it should not be relied upon as such. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance.

Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same. RHBAM does not guarantee that all risks associated to the transactions mentioned herein have been identified, nor does it provide advice as to whether you should enter into any such transaction. The contents hereof may not be reproduced or disseminated in whole or in part without RHBAM’s written consent.

This podcast has not been reviewed by the Securities Commission Malaysia. You should not act on the information contained in this podcast without first independently verifying its contents.

Disclaimer for Video and Podcast by Economics and Market Strategy:

This report is prepared for information purposes only by the Economics and Market Strategy division within RHB Bank Berhad and/or its subsidiaries related companies and affiliates, as applicable (“RHB”). All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness.

Neither this report, nor any opinion expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or financial instruments mentioned herein. RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for any direct or consequential loss arising from the use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose without prior consent of RHB and RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for the actions of third parties in this respect. Recipients are reminded that the financial circumstances surrounding any company or any market covered in the reports may change since the time of their publication. The contents of this report are also subject to change without any notification.

This report does not purport to be comprehensive or to contain all the information that a prospective investor may need in order to make an investment decision. The recipient of this report is making its own independent assessment and decisions regarding any securities or financial instruments referenced herein. Any investment discussed or recommended in this report may be unsuitable for an investor depending on the investor’s specific investment objectives and financial position. The material in this report is general information intended for recipients who understand the risks of investing in financial instruments. This report does not take into account whether an investment or course of action and any associated risks are suitable for the recipient. Any recommendations contained in this report must therefore not be relied upon as investment advice based on the recipient's personal circumstances. Investors should make their own independent evaluation of the information contained herein, consider their own investment objective, financial situation and particular needs and seek their own financial, business, legal, tax and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

RHB (including its respective directors, associates, connected parties and/or employees) may own or have positions in securities or financial instruments of the company(ies) covered in this research report or any securities or financial instruments related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities or financial instruments. Further, RHB does and seeks to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities or financial instruments of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such banking, advisory or other services from any entity mentioned in this research report.

RHB (including its respective directors, associates, connected parties and/or employees) do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise from any reliance based on this report or further communication given in relation to this report, including where such losses, loss of profits or damages are alleged to have arisen due to the contents of such report or communication being perceived as defamatory in nature.

This podcast has not been reviewed by the Securities Commission (SC) and/or Bank Negara Malaysia (BNM).

RHB Bank Berhad 196501000373 (6171-M)

RHB Merge Malaysia

Get in touch with RHB Premier today.

Visit www.rhbgroup.com/overview/premier or any of our Premier Centres