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Jonathan Ng

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Jonathan Ng

Economics at Singapore Management University

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Here to give my 2 cents worth!

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Economics at Singapore Management University

Jonathan Ng

Economics at Singapore Management University

81Upvotes
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Investments

Stocks Discussion

Stocks

! Ticker: SGX:1D8 Industry: Healthcare Business Overview Singapore O&G Ltd. (SOG), headquartered in Singapore, is an investment holding company engaged in the provision of specialist medical services to women & children. Their business segments include Obstetrics & Gynaecology (O&G), Cancer-related, Dermatology, and Paediatrics. ! Source: Annual Report 2018 In 2018, the largest contribution to revenue is O&G, followed by Dermatology, Cancer-related and Paediatrics. Group Structure ! Source: Annual Report 2018 - The O&G segment includes general obstetrics, labour and delivery, general gynaecology and surgery, female pelvic medicine, urogynaecology and reconstructive surgery. - The Cancer-related segment includes gynae-oncology, breast and general surgey. - The Dermatology segment relates to aesthetic dermatological procedures, dermatologic and laser surgery, and general skin care. - The Paediatrics segment includes childhood immunization, child nutrition, growth and developmental assessment. SWOT Analysis On strengths, Singapore O&G has a well-established team of doctors that are experienced in women’s and children’s healthcare. The company has also been able to capture growing market share within the private live birth sector. Their clinics are also conveniently located in the Central and East regions of Singapore. Being one of the first few in Singapore to successfully perform the High Intensity Focused Ultrasound procedure last year, they are also forward-looking. On weaknesses, their business is not diversified geographically as they operate only in Singapore. This may expose them to social, economic and political threats here. On opportunities, the increasing number of cancer cases, especially breast cancer being the top cancer that affects women, will serve as a strong driver of growth in the near future. On the back of Singapore’s ageing population, it presents opportunities that O&G can tap on to address healthcare needs of elderly women. On threats, there are competitors that have a huge market share e.g. Raffles Medical Group. Their O&G segment will also be affected by the decreasing fertility rate in Singapore. Share Price Performance ! Source: TradingView For the last year, the share price of SOG increased by 14.93%. Over the last 5 years, SOG’s stock price has been outperforming the STI. Financials ! Singapore O&G’s revenue grew by 16.0% in 2018, driven by the O&G, cancer-related and paediatrics segments. Net profit saw an increase of 7.5%. If a one-off goodwill impairment and non-recurring income were to be excluded, net profit would have increased by 29.4% to $11.0m. The one-off goodwill impairment of $2.8m was due to the excess of carrying amount of cash generating unit for Dermatology segment, and non-recurring income of $1.1m arose from the settlement of a dispute. Current assets increased 27.4% mainly due to an increase in inventories, trade and other receivables, and cash and cash equivalents. On the other hand, current liabilities rose 26.9% because of an increase in trade and other payables. Piotroski F-Score For my analysis, I will be using the Piotroski F-Score. It assigns a number between 0-9 which is used to determine the strength of a company’s financial position. Comparing 2018 vs 2017, the criteria awarded with a point (1) means there was an improvement from the previous year and vice-versa (0). ! Singapore O&G was awarded a score of 8, which is good. Current ratio rose from 3.72 to 3.74, meaning they are in a much better position to pay off their debt obligations. The company’s return on assets and asset turnover ratio also increased, indicating that they have become more efficient at using their assets to generate earnings and revenue respectively. On the other hand, gross margin ratio dropped from 0.35 to 0.33. Valuation ! From the above figures, Singapore O&G is slightly undervalued. Even though P/B, P/E and P/S ratio seem high, they are in fact lower than the industry average. They have also had consistently strong returns on capital, with the returns being higher than the industry average. Conclusion With the above analysis, the shares of Singapore O&G seem promising. The company has strong fundamentals of high profit margins, operating cashflows and no debt. They are also always seeking to hire the best medical professionals and are forward-looking. This economic moat will provide them with an edge over their competitors and place them in good stead for the long-term. Perhaps, management should also consider diversifying revenue stream out of Singapore through acquisitions or organic growth, and increase their number of key medical professionals as revenue and business development is very dependent on them.
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Investments

Stocks Discussion

! Ticker: SGX:BMT Industry: Healthcare & Energy Business Overview New Silkroutes Group Limited, headquartered in Singapore, is an investment holding company that operates in the healthcare and energy sectors. Formerly known as Digiland International Limited, the company’s healthcare segment focuses on the provision of healthcare and related services in Singapore, Vietnam and China. The company’s energy segment focuses on physical oil trades in Asian markets. They are also engaged in providing services such as asset management, business management and investment consultancy. Group Structure ! Source: Annual Report 2018 - Healthsciences International Pte Ltd (HSI) owns and operates primary care medical and dental clinics in Singapore and Vietnam, as well as hospital development services and pharmacy management systems in Singapore and China. They also provide dental and medical supplies. - International Energy Group Pte Ltd (IEG) trades oil and gas, produces power, and invests in strategic petrochemical assets. Share Price Performance ! Source: TradingView For the last year, the share price of BMT declined by 17.19%. Over the last 5 years, BMT’s stock price has had mixed performance with respect to the STI. Financials ! New Silkroutes’ revenue grew by 59.9% in 2018, driven by the healthcare business and increase in oil trading activities. Net profit saw a further dip to US$2.961m, attributed to the expenses of newly acquired dental companies, and one-off expenses of writing off of receivables and professional fees for corporate exercises. If the one-off expenses were to be excluded, the Group would have improved in its performance and reduced its net loss to US$0.62m. Current assets increased 9% mainly due to an increase in inventories, and cash and cash equivalents, while current liabilities rose 22% because of an increase in trade and other payables, and borrowings to finance oil trades. In 2018, the company also issued 25,394,048 more shares. Moving forward, healthcare will be New Silkroutes’ core business. Therefore, the company has divested its non-core assets, such as its 30% stake in New Silkroutes Asset Management Pte Ltd in 2017. Healthcare Segment Acquisitions of dental clinics and dental supplies companies in 2017 contributed to a 10 times growth in healthcare segment revenue. In 2018, HSI entered Vietnam under the brand name ‘The Dental Hub International’ through a joint venture. To break into the Chinese market, the Group acquired Shanghai Fengwei Garment Accessory Co., Ltd, a manufacturer and distributor of fabric and products used in healthcare consumables. With rising demand for healthcare in China, a healthcare consumables business will definitely see growth. However, the company’s acquisition of Shanghai Fengwei is a rather indirect route to enter the Chinese healthcare market. They also paid a hefty price tag of S$12.5m for it. Only time will tell if this acquisition pays off and increase profit margins. The Group also looks to grow its healthcare segment organically in the future to balance their initial foray into healthcare which consisted of only acquisitions. Energy Segment For the energy segment, increased oil trading activities and logistics capacities helped to increase revenue by 1.6 times. The company altered their strategy to charter vessels instead of leasing fixed storage to be able to redeploy its vessels according to changes in market demands. This has helped to strengthen their shipping logistics capabilities, which will put them in a good position to come. However, financing costs remained high due to rising oil prices and stronger USD. Just March this year, the Group sold its stake in IEG for US$10m in cash. The purchaser, TK Energy Limited, will make available a US$10m loan to New Silkroutes which will be deemed repaid in full when the sale is completed. This will strengthen the company’s earnings and financial position, streamline operations to focus on its healthcare segment, and enhance the long-term interests of shareholders. Piotroski F-Score For my analysis, I will be using the Piotroski F-Score. It assigns a number between 0-9 which is used to determine the strength of a company’s financial position. Comparing 2018 vs 2017, the criteria awarded with a point (1) means there was an improvement from the previous year and vice-versa (0). ! New Silkroute was awarded a score of 1, which is bad. Current ratio fell from 1.43 to 1.27, but is still above 1 which means they are able to pay off their debt obligations. Gross margin ratio also dropped from 2017 to 2018. The company’s return on assets also dropped further, indicating that they have become more inefficient at using their assets to generate earnings. However, the Group has become efficient in using their assets to drive revenue as asset turnover increased. Valuation ! From the above figures, it seems that New Silkroutes is structurally fundamentally weak. Even though P/B ratio looks considerable fine, but P/E and P/S ratios prove my point. They also have negative returns on capital which suggests that the company is destroying its own value. Conclusion With the above analysis, the shares of New Silkroutes seam bearish. I do not see strong impetus that will create an economic moat for New Silkroute for the next couple of years. Current shareholders are hinging on the company’s efforts to refocus on the healthcare segment to deliver them returns. I would skip this stock as the company is fundamentally weak and does not have a good track record. Management has also not outlined a concrete plan or vision to develop the healthcare segment. Hopefully, this foray into healthcare will not be another misadventure like their fund management that never panned out.
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Stocks

Investments

! Ticker: SGX:BMT Industry: Healthcare & Energy Business Overview New Silkroutes Group Limited, headquartered in Singapore, is an investment holding company that operates in the healthcare and energy sectors. Formerly known as Digiland International Limited, the company’s healthcare segment focuses on the provision of healthcare and related services in Singapore, Vietnam and China. The company’s energy segment focuses on physical oil trades in Asian markets. They are also engaged in providing services such as asset management, business management and investment consultancy. Group Structure ! Source: Annual Report 2018 - Healthsciences International Pte Ltd (HSI) owns and operates primary care medical and dental clinics in Singapore and Vietnam, as well as hospital development services and pharmacy management systems in Singapore and China. They also provide dental and medical supplies. - International Energy Group Pte Ltd (IEG) trades oil and gas, produces power, and invests in strategic petrochemical assets. Share Price Performance ! Source: TradingView For the last year, the share price of BMT declined by 17.19%. Over the last 5 years, BMT’s stock price has had mixed performance with respect to the STI. Financials ! New Silkroutes’ revenue grew by 59.9% in 2018, driven by the healthcare business and increase in oil trading activities. Net profit saw a further dip to US$2.961m, attributed to the expenses of newly acquired dental companies, and one-off expenses of writing off of receivables and professional fees for corporate exercises. If the one-off expenses were to be excluded, the Group would have improved in its performance and reduced its net loss to US$0.62m. Current assets increased 9% mainly due to an increase in inventories, and cash and cash equivalents, while current liabilities rose 22% because of an increase in trade and other payables, and borrowings to finance oil trades. In 2018, the company also issued 25,394,048 more shares. Moving forward, healthcare will be New Silkroutes’ core business. Therefore, the company has divested its non-core assets, such as its 30% stake in New Silkroutes Asset Management Pte Ltd in 2017. Healthcare Segment Acquisitions of dental clinics and dental supplies companies in 2017 contributed to a 10 times growth in healthcare segment revenue. In 2018, HSI entered Vietnam under the brand name ‘The Dental Hub International’ through a joint venture. To break into the Chinese market, the Group acquired Shanghai Fengwei Garment Accessory Co., Ltd, a manufacturer and distributor of fabric and products used in healthcare consumables. With rising demand for healthcare in China, a healthcare consumables business will definitely see growth. However, the company’s acquisition of Shanghai Fengwei is a rather indirect route to enter the Chinese healthcare market. They also paid a hefty price tag of S$12.5m for it. Only time will tell if this acquisition pays off and increase profit margins. The Group also looks to grow its healthcare segment organically in the future to balance their initial foray into healthcare which consisted of only acquisitions. Energy Segment For the energy segment, increased oil trading activities and logistics capacities helped to increase revenue by 1.6 times. The company altered their strategy to charter vessels instead of leasing fixed storage to be able to redeploy its vessels according to changes in market demands. This has helped to strengthen their shipping logistics capabilities, which will put them in a good position to come. However, financing costs remained high due to rising oil prices and stronger USD. Just March this year, the Group sold its stake in IEG for US$10m in cash. The purchaser, TK Energy Limited, will make available a US$10m loan to New Silkroutes which will be deemed repaid in full when the sale is completed. This will strengthen the company’s earnings and financial position, streamline operations to focus on its healthcare segment, and enhance the long-term interests of shareholders. Piotroski F-Score For my analysis, I will be using the Piotroski F-Score. It assigns a number between 0-9 which is used to determine the strength of a company’s financial position. Comparing 2018 vs 2017, the criteria awarded with a point (1) means there was an improvement from the previous year and vice-versa (0). ! New Silkroute was awarded a score of 1, which is bad. Current ratio fell from 1.43 to 1.27, but is still above 1 which means they are able to pay off their debt obligations. Gross margin ratio also dropped from 2017 to 2018. The company’s return on assets also dropped further, indicating that they have become more inefficient at using their assets to generate earnings. However, the Group has become efficient in using their assets to drive revenue as asset turnover increased. Valuation ! From the above figures, it seems that New Silkroutes is structurally fundamentally weak. Even though P/B ratio looks considerable fine, but P/E and P/S ratios prove my point. They also have negative returns on capital which suggests that the company is destroying its own value. Conclusion With the above analysis, the shares of New Silkroutes seam bearish. I do not see strong impetus that will create an economic moat for New Silkroute for the next couple of years. Current shareholders are hinging on the company’s efforts to refocus on the healthcare segment to deliver them returns. I would skip this stock as the company is fundamentally weak and does not have a good track record. Management has also not outlined a concrete plan or vision to develop the healthcare segment. Hopefully, this foray into healthcare will not be another misadventure like their fund management that never panned out.
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Investments

Stocks

Equities

Securities

Hello! This was a rather interesting question so I went to do some research: ! TL;DR Alibaba has filed confidentially for a Hong Kong listing that could raise as much as $20 billion, and could take place as early as 2019Q3. With its Hong Kong mega-listing, its US share price will most likely rally higher due to overall positive outlook on the growth profile of Alibaba, given its proven track record of positive year-on-year growth. However, if the US-China trade war continues to weigh down on the global economy, this will have a sizeable impact on Alibaba’s US & HK share price. This mega-listing is certainly one to watch. Alibaba Group Business Overview Alibaba Group Holding Limited (NYSE:BABA) is a Chinese holding company that specializes in 4 segments: core commerce, cloud computing, digital media and entertainment, and innovation initiatives. Founded in 1999 by Jack Ma, they are based in Hangzhou, China, and have a global presence. Some of their companies include: ! Its competitors include Amazon, Meituan-Dianping and Tencent Holdings Ltd. About the IPO The Group has filed confidentially for a Hong Kong listing that could raise as much as $20 billion, and could take place as early as Q32019. This would provide them with funds to invest in technology (especially so with the US-Huawei Saga) and compete better against their competitors in the various business segments. This also comes on the back of the US-China trade war and slowing economic growth in China where Alibaba is struggling to sustain growth. Previously, companies with a governance system where top executives could nominate a majority of board members could not list on the Hong Kong Stock Exchange. This included Alibaba and thus they floated on the New York Stock Exchange. However, with the new rules for secondary listings introduced last year, they can apply for an exemption to be listed. How will its Hong Kong listing affect its US share price? Firstly, with the Group’s proposed one-to-eight stock split of their ordinary shares, there will be an immediate decrease in its US share price after the stock split. For example, its share price will drop from $168.25 to $21.03 (as of 20/06/2019). This stock split will increase flexibility in future capital raising activities and increase the number of shares available for issuance, at a lower per share price. Since small investors find the stock more affordable and purchase it, this boosts demand and drives up share prices. Secondly, the announced major business reshuffle to strengthen leadership of the innovation group and bolster its investment focus may boost investor confidence. Chief Financial Officer Maggie Wu will serve concurrently as Head of Strategic Investment Development There are also other new initiatives and reorganisation of business segments. With its Hong Kong mega-listing, its US share price will most likely rally higher due to overall positive outlook on the growth profile of Alibaba, given its proven track record of positive year-on-year growth. However, if the US-China trade war continues to weigh down on the global economy, this will have a sizeable impact on Alibaba’s US & HK share price. Looking back on 2019 alone, Alibaba gained more than 21%, rallying ahead of the broad market. Should you invest in the IPO? With the above points in consideration, Alibaba indeed has strong economic moats and the US-China trade war is only a bump in the road. Even with China’s slowdown, they continue to grow market share and broaden revenue mix and investment profile. However, in the wake of the Hong Kong extradition bill protests, there might be potential repercussions on Alibaba’s HK listing. All in all, this mega-listing is certainly one to watch.

General

Hello! From what I have learnt in school, coupled with some research, this is what I have put together: ! TL;DR Pretty sure many of us have heard our parents saying, “You think I print money one meh??’ But do you actually know who prints & creates money? Both the Central Bank and commercial banks have a role to play in this! And how does this printed money enter the economy? There are in fact various ways to boost money supply: monetary policy, open-market operations, modifying reserve requirements, government spending & debt monetization. In the first part of my answer, I briefly touched on who prints the physical money and creates credit. If you want to jump straight into knowing how does money enter the economy, just skip all the way to the end! Who Prints the Physical Money? Physical money is printed to meet the supply of cash withdrawals at commercial banks, and to replace worn out currency. In fact, printing money does not increase the money supply. Printed money has no effect on the economy as long as it remains in the print shop. In SG, the Monetary Authority of Singapore (MAS) produces notes and coins. In the US, the Bureau of Engraving & Printing prints notes while the US Mint produces coins. Both of them come under the Treasury Department. Who Creates Money (Credit)? When you take up a $100 loan from a bank, it credits your account with $100 and thus ‘new money’ has been created. This money did not exist until it was credited to your account. In the UK, commercial banks create 79% of the money in the economy through credit. This shows that credit creates much of the money in an economy. ! Source: Bank of England Commercial banks have accounts with the Central Bank called reserves account. A commercial bank’s reserves are the same as its reserve account, vault cash, and savings account deposits. Commercial Bank’s Reserves = Reserve Account = Vault Cash = Savings Account Deposits Therefore, when most of our friends say the Central Bank ‘prints money’, they usually mean the Central Bank adding credit to the commercial banks’ reserves. Then… you may be thinking: Can the commercial banks create as much money as they like by giving out more loans? This leads us to the next part. Why Commercial Banks Can Create Money? This is because of fractional reserve banking which has been around for centuries. As most people are not going to need their money in the form of cash at the same time, commercial banks practice fractional reserve banking where only a fraction of deposits is backed by actual cash and available for withdrawal. This fraction of deposits is dictated by the reserve requirements set by the Central Bank. If the required reserve ratio is 10%, then the commercial bank is obliged to keep at least 10% of its total deposits as reserves and not loan it out. How Exactly Does Printed Money Enter the Economy? Money gets injected into the economy mainly through these ways: - Monetary Policy - Open-Market Operations - Modifying Reserve Requirements - Government Spending - Debt Monetisation Monetary Policy When the Central Bank uses expansionary monetary policy, it lowers the short-term interest rates. This makes borrowing cheaper and boosts economic activity. Therefore, money supply is increased by injecting the printed money into the economy. However, Singapore’s monetary policy does not target interest rates but instead focuses on the exchange rate. Open-Market Operations When the Central Bank purchases government securities in the open market, usually held by commercial banks and private companies, they get cash in exchange for the bonds, increasing the money supply in the economy. Modifying Reserve Requirements The Central Bank can lower the reserve requirements so that commercial banks are able to issue more loans, increasing the money supply in the economy. Government Spending The government can increase the supply of money in the economy by implementing a stimulus package. This is usually done during a recession. An example is the Resilience Package launched during Singapore Budget 2009 in light of the 2008 Sub-Prime Mortgage Crisis. Debt Monetisation With a government deficit, the government can finance it by issuing new bonds. The Central Bank can then buy these bonds through open-market operations, increasing the money supply in the economy. When the government bonds held by the Central Bank are due, the Central Bank will return the interest it has gained back to the government and the government does not need to repay the Central Bank. This process of financing government spending by the Central Bank is called ‘monetising the debt’. This option is only possible if the country creates its own money, so countries in the European Union are unable to monetise debt. An example of a country that engages in debt monetization is the US. The US Federal Reserve frequently purchases US Treasury bills. This decreases the supply of bills and make the remaining bills more valuable, attracting buyers. Therefore, the US Treasury does not have to pay high interest on its bills to attract buyers due to its scarcity, driving down interest rates on the US government’s debt. The Fed is willing to buy the bills only if its purpose was to lower interest rates and spur economic growth (this process is otherwise known as quantitative easing). However, debt monetisation results in inflation as when more money is created, the value of each unit of currency will be worth less. Similarly, money can be removed from the economy by decreasing money supply through contractionary monetary policy, the Central Bank selling government securities and increasing reserve requirements. ! Source: Wikipedia Hope this helps!
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Jonathan Ng
Jonathan Ng, Economics at Singapore Management University
Level 5. Genius
Answered on 18 Jun 2019
Hi Eileen, Jonathan from Seedly here! Could I trouble you to contact [email protected] so we can better understand the problem you are facing and work to solve it? Thank you!

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Jonathan Ng
Jonathan Ng, Economics at Singapore Management University
Level 5. Genius
Answered on 18 Jun 2019
Hi Anon, Jonathan from Seedly here! Could I trouble you to contact [email protected] so we can better understand the problem you are facing and work to solve it? Thank you!

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Jonathan Ng
Jonathan Ng, Economics at Singapore Management University
Level 5. Genius
Answered on 18 Jun 2019
Hi Shariff, That is a great suggestion and we will be forwarding it to the products team for their perusal. Keep the feedback coming as we continually seek to improve the app for our users. Have a great day! :)

Stocks Discussion

Investments

! Ticker: SGX:P34 Industry: Food Processing Business Overview ! Do these chocolates look a little familiar? They are brands owned by Delfi Limited. Delfi Limited, headquartered in Singapore, is a chocolate confectionary manufacturer. They have a well-established portfolio of chocolate confectionary brands, including their own brands and agency brands, and distribute them to its core markets in Indonesia, Philippines, Singapore and Malaysia. Source: 2018 Annual Report The company has 2 manufacturing facilities located in Indonesia & Philippines. Their products are also available in Thailand, Brunei, India, South Korea and Vietnam. They were formerly known as Petra Foods Limited and listed on the SGX since 2004. Furthermore, Delfi published their first Sustainability Report in 2018, highlighting their commitment to sustainable business practices. Share Price Performance ! Source: TradingView For the last year, the share price of P34 has declined marginally by 3.03%. Over the last 5 years, P34’s stock price performed poorly with respect to the STI. Financials ! Delfi’s revenue grew by 12% in 2018, mainly due to higher sales from their own brands which increased 16% from 2017. Their restructuring efforts for long-term sustainable growth are finally bearing fruits, even though 2018’s revenue were still 15% below that of 2014 but were well above the levels from 2015 to 2017. Net profit also grew by 5.98% attributed to their cost-containment initiatives despite currency headwinds in the past year. One of the main highlights of 2018 is their acquisition of the rights to the Van Houten brand for Asian markets. Van Houten is a well-known and trusted brand in Southeast Asia, allowing them to leverage the brand name. For 2018, they will be paying out a dividend of 1.89 US cents, representing a payout ratio of 55.4% which is rather sustainable for the company. For 1Q2019, both revenue and net profit grew from 1Q2018. This was because of the success of their promotional initiatives to capture Valentine’s Day demand and sales driven by Lebaran festivities. Piotroski F-Score ! For my analysis, I will be using the Piotroski F-Score. It assigns a number between 0-9 which is used to determine the strength of a company’s financial position. Comparing 2018 vs 2017, the criteria awarded with a point (1) means there was an improvement from the previous year and vice-versa (0). Delfi Limited was awarded a score of 7, which is towards the high side of neutral. Current ratio fell from 1.64 to 1.55, but is still above 1 which means they are able to pay off their debt obligations. Gross margin ratio also dropped from 2017 to 2018. I expect the company to continue to drive modest positive revenue growth over the next couple of years as they continue to benefit from their restructuring efforts. They should also reap from their increased investment in brand-building initiatives and their route-to-market capabilities. I also forecast profit margins to maintain as they proactively seek to mitigate higher input costs through pro-active price adjustments, product right-sizing and launching new higher margined products. Valuation ! From the above figures, it seems that Delfi is overvalued. Both their P/B and P/E ratio is high at 3.60 and 34.59 respectively, which is significantly higher than its peers. Since the P/S ratio of 1.75 is higher than 1.5, it also supports my claim of being overvalued. However, Delfi has had consistently strong returns on capital for the past 3 years, with the returns being higher than the industry average. Conclusion With the above analysis, the shares of Delfi Limited seem overvalued. Even though they have strong fundamentals of high profit margins and low debt levels, I believe the company needs to slowly shift their focus to expand their distribution networks in regional markets outside of Indonesia and Philippines in order to sustain growth. Until they have a concrete plan to do this, I would skip this stock.
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Securities

ETF

Forex (FX)

Investments

Hello! ! TL;DR Taking up a position in a foreign ETF that is not in your base currency will subject you to foreign exchange risk. Exchange rate fluctuations have the potential to erode your returns from the ETF. Therefore, it is best to manage your foreign exchange risk exposure that aligns with your long-term investment goals. What are Exchange Traded Funds (ETFs)? ! I’m sure many of us know what ETFs are so I’m not going to go into the details. In the broad spectrum of investing, ETFs is considered a “passive” approach to investing in an equity portfolio for long-term investment. However, it is not exactly passive as you would still have to monitor the index the ETF is tracking from time to time to see if it is performing. Why is there Exchange Rate Fluctuation? In the short-run, currency volatility is due to news like economic data release or political events which are unpredictable. In the long-run, forces of demand and supply of the currencies determine their price in the foreign exchange market. This depends on investors’ confidence in the assets of that country and forex traders’ confidence in the country’s currency. The central bank’s monetary policy will also have an effect on the national currency. For Singapore, we adopt an exchange-rate-centered monetary policy due to the small and open nature of our economy & our dependence on trade. What is Currency Risk/Foreign Exchange Risk? ! Source: MBA Mondays If you have been reading various ETF prospectuses, you would have came across these words: ‘currency risk’ and ‘foreign exchange risk’. With all foreign investments, there is bound to be currency risk. Currency risk is the impact of exchange rate movements on your foreign investments. For the scenarios below, I am going to assume that your base currency is SGD. If you would like to buy the SPDR S&P 500 ETF (NYSE Arca:SPY), you will be subjected to currency risk as the ETF is invested in instruments denominated in USD. If the USD appreciates against the SGD (or SGD depreciates against the USD), you will gain. On the contrary, if the USD depreciates against the SGD (or SGD appreciates against the USD), you will lose money. You may think that these exchange rate fluctuations do not affect your foreign investments significantly, but think again! If the US ETF fell 5% while the USD depreciated by 5% against the SGD, then you would see a total loss of 10%. Your Returns in SGD (Home Currency) = Change in Price of Security in USD (Foreign Currency) + Exchange Rate Change from USD to SGD (Foreign Currency to Home Currency) However, if you are buying the SPDR Straits Times Index ETF (SGX:ES3), you will not be subjected to currency risk as the ETF is invested in instruments denominated in SGD. Foreign exchange rates can be very volatile, change quickly and unpredictably, so please take this into account when making an investment! Difference in Currency Risk Exposure Your vulnerability to exchange rate volatility depends on the time horizon you hold the ETFs. With a shorter time horizon, you are at a higher currency risk as you are unable to ride the rough patches out. With a longer time horizon, there is lower currency risk and you may even benefit from it. Managing Currency Risk Exposure If you are worried about your currency risk exposure, fret not! Here are various methods to manage it: - Longer Investment Time Horizon: By staying invested for the long-term, you are able to ride out short-term market fluctuations and gain value. - Avoid Foreign ETFs: By investing in ETFs with your own base currency, you avoid foreign exchange exposure all together. However, the downside is that you will be less diversified. - Buying Currency-Hedged ETFs: Currency-hedged ETFs use financial contracts to offset the impacts of exchange rates on returns. This cancels out any losses from a depreciating foreign currency and wins from an appreciating foreign currency, so you get the same returns as a local investor. I guess we can’t always have the best of both worlds! - Diversify Your Portfolio Hope this helps!
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