Lower returns by EPF in 2018 likely


Many external reasons putting pressure on dividends for last year

It’s that time of the year again when the much-awaited dividend rates of the Employees Provident Fund (EPF) will be announced.

Typically, the EPF will announce the dividends together with its performance for the year in mid-February, which is some three weeks away.

However, speculation has already cropped up on the provident fund likely declaring a lower return than the 6.9% announced last year.

The prospects of the EPF’s lower performance in 2018 has been attributed to the change in government in May last year.

Parti Gerakan president Datuk Dominic Lau’s assertion is that the Pakatan Harapan government’s decision to review infrastructure projects has caused the value of several listed companies to deteriorate.

Such simple analysis on the EPF’s performance is shallow.

The EPF puts 40% of its assets in the equities market and its returns are very much dependent on the performance of Bursa Malaysia.

However, the local stock market has had a difficult year and it is more than just because there is a change in government.

Emerging markets as a whole had a difficult 2018, as funds flowed out of the region. The combination of the US raising interest rates and the trade war between China and the US were reasons for investors to pull their money out of emerging markets.

Apart from China, the currencies of both Turkey and Argentina crashed due to the fears of weak economic fundamentals.

According to preliminary figures from the Institute of International Finance, Inc (IIF) on emerging markets, foreign funds came in at US$195.5bil for 2018, which is nearly US$173bil lower compared to 2017.

This means foreign funds coming into the stocks and bonds in emerging markets tracked by IIF were down 48% in 2018 compared to 2017.

The fund flows in 2018, however, were higher than US$149bil in 2016 and US$81bil in 2015.

The IIF’s analysis tracks major emerging markets, including the likes of Brazil, Turkey, Argentina, Indonesia, India and China.

According to MIDF Research’s well-followed fund flows tracker, between January and November last year, the equity and bond market saw net outflows of RM10.7bil and RM28.bil, respectively. The outflows were generally in line with the lower amount of capital flows into emerging markets last year.

A broader measure of the performance of the regional markets is the MSCI Emerging Market Index, which was down 18% in 2018.

As for Bursa Malaysia, the benchmark FBM KLCI closed 5.17% lower in 2018 at 1,690 points, while the broader FBM100 stock index was down 8.37% and the FBM70 was down 17.43%.

Malaysia fared much better compared to regional stock markets. For instance, the Hang Seng Index shed 15.35% while China’s Shanghai Stock Exchange lost 25.52%.

Closer to home, the Indonesia Stock Exchange shed 2.28% last year while Singapore’s Straits Times Index was down 10.54%. Indonesia performed better in 2018 after a disastrous 2017 when the rupiah depreciated significantly.

A change in government contributed to the weak performance of companies on Bursa Malaysia. However, it is not the over-riding reason, as external factors contributed more to the poor investor sentiment on emerging markets as a whole.

The companies that were affected on Bursa Malaysia are generally those with government contracts. The new government put a stop to the inflated contracts to control the federal government purse strings and to break up monopolies.

If not for the change in government, we would not have seen the cost of the mass rapid transit two coming down by more than RM1bil, phase three of the light rail transit project being cut by almost half from its estimated bill of RM31bil, the review of the RM65bil East Coast Rail Link and the postponement of the RM60bil high-speed rail project.

This is on top of the controversial procurement contracts given by the previous government such as for the provision of immigration systems and the upgrade of railway tracks.

The government’s decision to break up monopolies affected several government-linked companies. Most affected are those operating in the telecommunications space such as Telekom Malaysia Bhd and Axiata Group Bhd , as the government wants to reduce the cost of providing broadband.

The Pakatan Harapan government was voted in on the wave to eradicate corruption and improve governance in the handling of public funds. Among the first things that it did was to control the purse strings of the government and review the major projects.

The control of the purse strings of the Treasury will contribute to Malaysia’s current account surplus that is expected to be 2% of GDP for 2019.

The country already has a deficit in its fiscal account and cannot afford to see a deterioration in its current account. If Malaysia had carried out all the mega-projects as planned, the import bill would have been huge, causing a strain on the current account.

Combining the huge import bill with the current low commodity prices, the outcome could have been a disaster for Malaysia’s national balance sheet. Not to mention the national debt, which certainly is much higher than what had been reported by the previous government.

The EPF declaring a lower return for its 2018 performance should not come as a surprise.

The provident fund, with some RM800bil, depends on the local stock market for about 60% of its gross income. The other major contributor is its investments in government bonds and securities, where the risk and returns are low.

The Malaysian stock market was weak in 2018 but other markets fared even worse.

Volatility was the theme of 2018. Whatever positives in emerging markets were over-shadowed by the slowdown in China, the trade war, fears of the contagion from Argentina and Turkey spreading to other emerging markets, and the strengthening of the US dollar on the back of a rising interest rate environment.

Although Bursa Malaysia has fared worse than in 2017, the general economic fundamentals remain intact. This is despite Malaysia suffering from weak crude palm oil and crude oil prices.

The recovering strength of the ringgit is an indicator of the health of the economy.

Before May 9, 2018, the country was heading towards the cliff. The slew of mega projects and the level of corruption was going to cause a break in government finances. After May 9, the push towards the cliff has stopped.

But the new Malaysia needs more measures before money starts coming back into the economy and stock market. Blaming the change in government on the EPF possibly giving a lower return is too simplistic an analysis.

 

Analyst Reports , EPF , dividends