LAST year when the Employees Provident Fund (EPF) declared a dividend of 6.4% for its contributors, it came as a pleasant surprise to most people.
The dividend, which is for its performance in 2015, was lower than the 6.75% declared in the previous year. But nobody quibbled over it. One reason was the bad over-riding sentiment during the month of February a year ago.
Crude oil prices had dipped below US$30 per barrel, dragging the ringgit along with them. Global stock markets roiled on concerns over China’s economy heading for a hard landing, while Britain and the United States were at a political crossroads.
The tumbling oil price and weakening ringgit against the US dollar was a drag on the Malaysian economy. Last year, the ringgit was volatile until Nov 11.
China devaluing its currency gradually was also of no help to the ringgit. As the yuan fell against the US dollar, the ringgit weakened.
Against the slew of bad news, the EPF’s dividend of 6.4% was viewed as rather commendable. However, one has to take cognisance of the fact that the dividend declared in February last year was based on the stock market’s performance in 2015.
In 2016, the local and global capital markets fared badly for most parts of the year. Wall Street only started to pick up and charge ahead after Nov 8 last year.
Hence, contributors should brace themselves for a dividend that could be lower than 6% this year. It will be tough for the EPF to declare a dividend anywhere near the numbers it announced last year or the previous years.
The writing is already on the wall. The EPF’s quarterly results are already indicating that the pension fund would be earning less from its investments.
In the first quarter, the EPF’s investment income fell 29.21% compared to the corresponding period in 2015, while in the second quarter, the investment income dropped 26.04%.
In the third quarter of last year, the EPF’s investment income of RM12.32bil was higher by 29.21% compared to the same period in 2015.
The final-quarter results should be out anytime soon. But one must note that while developed markets picked up after Donald Trump was elected as president of the US, emerging economies reeled due to the outflow of funds back to the US.
While Wall Street roared ahead with Trump’s economic stimulus plans, emerging markets suffered from volatility in the currencies. The ringgit was among the most volatile currencies until Bank Negara intervened on Nov 11.
By the end of last year, Bursa Malaysia once again closed the year in negative territory – the third time in a row.
A substantial amount of the EPF’s investments is in the local equities market. When Bursa does not do well, it affects the EPF’s investment income. Not only is its income affected, but the EPF also provides for the diminution in the value of its equities as part of adopting prudent accounting practices.
The provisions impact its profitability and hence its ability to pay out dividends.
In previous years, the EPF managed to do well because its overseas investments and assets made more than average returns. Based on historical numbers, the EPF’s investments overseas are less than 29% of its total portfolio, but the contribution to its total income was almost about 40%.
However, the global economic scenario was fairly steady in 2015. The US was on recovery mode, while Japan and Europe had embarked on a money-printing exercise to lift the flagging economies.
Last year started with crude oil falling below US$30 per barrel in January. Britain eventually voted to be out of the European Union in June, something that shocked global stock markets.
And finally, the US stock market was in a state of uncertainty until Nov 8 when the presidential election was over.
In a nutshell, the EPF would not have been able to do well in its overseas investments.
Last year, the corporate earnings of companies listed on Bursa were down by 10% on average, the first time it had fallen so much in recent years.
Other local funds have declared much lower dividends. Lembaga Tabung Haji’s basic dividend for 2016 was 4.25%. Permodalan Nasional Bhd’s Amanah Saham Bumiputera declared 6.75 sen per unit, while Amanah Saham Nasional declared five sen per unit.
Under such a scenario, anything that is close to a 6% dividend from the EPF is commendable.