What to do when the Ringgit is weak but the Dollar is Strong

February 2015

What to do when the Ringgit is weak but the Dollar is strong

A topic hot on the lips of investors is the weakening Malaysian Ringgit against a strengthening US Dollar (USD). The local currency has fallen by about 3% against the greenback so far this year, according to Bloomberg’s records. It is labeled as one of the two worst performers among the major Asian currencies, reaching its weakest level yet since April 2009 at 3.6375 this past 29 January 2015.

Meanwhile, the drop in oil prices and a strengthening US economy – drawing anticipation of a tightening monetary policy by the Federal Reserve by this mid- or year-end – leads to a continued USD bull rally. Many predict the greenback will further strengthen throughout 2015.

However, investors should not lament the present currency conditions, as there are investment opportunities to take advantage of in light of this situation.

The strong USD makes Malaysian exports more competitive for one. Companies that benefit from this include those in the rubber gloves, semiconductor and electrical and electronics (E&E) sector, as they are largely export based.

Positive sales figures and future projections in the abovementioned sectors also add to the investment appeal. Global sales in the semiconductor sector peaked in the fourth quarter last year, and the World Semiconductor Trade Statistics is anticipating higher global semiconductor sales. Growth forecasts for 2014, 2015 and 2016 stand at 2.4%, 2.5% and 1.4% respectively, driven by rising demand for low- to mid-priced smartphones from emerging markets and the automotive industry regardless of local currency performance.

In rubber glove manufacturing, while growth was sluggish last year due to a slowing global economy, it’s expected to bounce back in resilience this year. Global demand is expected to grow 8% to 10% for 2015, amid the Ringgit’s weakening against the USD. Moving towards 2020, the global market share of Malaysian glove companies is anticipated to grow to 65% from its current share of 62%. All this spells good potential for players in this sector.

Another option in taking advantage of the strong USD is foreign stocks or local ones with foreign subsidiaries, such as in the shipping and the oil and gas industry. Such stocks are expected to bring about higher dividend returns in the current economic condition.

Those who are averse to stock trading can consider utilising currency carry trades. For the unfamiliar, this is when one sells a relatively lower interest rate yielding currency and buys a different currency with a higher interest rate. While common pairings include the Japanese Yen against the Australian (AUD) or New Zealand Dollar (NZD), as interest rate spreads between the AUD or NZD and the Yen are high, pairing options to consider now are the declining Japanese Yen or Euro with the strengthening USD.

Investing aside, a rising USD doesn’t necessarily mean you’re resigned to penny pinching in terms of cost of living. The glass can be half full. One way to get around that is to make smart selections for your next travel destination. Visit countries with relatively weaker currencies, for example. America is going to be more expensive this time around, so opt to visit Europe or Japan instead, where currency exchanges aren’t as high.

While the Euro hit a one week high in mid-February, it’s largely anticipated to remain on a decline against the USD. The Yen, although has shown signs of boosting recently, has been weak for the most part as Japan’s economy has long been in a recession and requires a turnaround. This makes for cheaper travel to the European continent or Japan compared to visiting the US. Travelling during the summer season will also save on winter wear costs, reducing overall travel expenditure.

Alternatively, another option is to travel regionally to more affordable countries around South East Asia, like Laos or Cambodia, or go off the beaten path to cheaper, less commercialised countries. Try Croatia, Bulgaria or Macedonia in Southeastern Europe instead of Italy, France or Spain in Western Europe.

For some ideas, Lonely Planet’s best value destinations for 2015 include South Africa (the Rand, or ZAR, has recently fallen to a six year low), Taiwan (Taipei is significantly cheaper than its regional neighbours of Hong Kong, Seoul or Tokyo) and Romania (the country is well connected with the rest of Europe and more affordable).

Finally, a weak Euro means luxury goods are relatively cheaper now. Although the Ringgit has been going down against the USD, it has strengthened against the Yen and Euro following the European Central Bank’s (ECB) quantitative easing programme. From fashion wear to watches and vintage wines, now is also an opportune time to make your final purchases before the goods and services tax (GST) kicks in come April.
 

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