As global inflation persists, the Singapore dollar has established itself as one of Asia’s most resilient currencies against the US dollar this year. Many analysts still remain positive on the currency, expecting the authorities to further tighten monetary policy to strengthen the Singapore dollar and combat rising prices. For context, MAS has strengthened the SGD three times, in January, April, and July, two of the announcements being impromptu.
All of this has undoubtedly had an impact on our daily lives. If you’ve been planning a trip, you’ve probably noticed that our currency is trading at record highs against several foreign currencies.
The following table illustrates how much you can get for S$1000 at the start of the year compared to now:
How much your SGD$1,000 can get you in 2022
| January 2022 | October 2022 | Percentage Change | |
| Japanese Yen | $85,320 | $101,045 | +18.4% |
| Malaysian Ringgit | $3,100 | $3,240 | +4.6% |
| RMB (China) | $5,710 | $4,970 | +5.4% |
| Pound Sterling (UK) | $550 | $620 | +12.7% |
| Euro | $650 | $710 | +9.4% |
| Dollar (US) | $740 | $700 | -5.8% |
While this is great news for travellers and will help to reduce inflationary pressure in Singapore, here are some reasons why investors should keep an eye on their portfolio, especially given the volatile foreign exchange market.
How a strong SGD affects your investments
1) Unfavorable exchange rate
When our assets are denominated in a foreign currency, the return on overseas investments fluctuates as the exchange rate fluctuates. In the case of SGD, a rising domestic currency indicates that foreign investments will have a reduced return when converted back to the local currency.
As an example, consider Nestle, which is publicly traded in Malaysia. While its year-to-date return is just down -1.4%, taking into consideration the Malaysia ringgit’s depreciation against SGD, you would be down -5.7% year to date.
| Asset | Action | |
| Starting Amount (In SGD) | 1000 SGD | |
| Starting Amount (In MYR) | 3100 MYR | Converting SGD to MYR in Jan (1SGD = 3.1 MYR) |
| Final Amount (In MYR) | 3056.6 MYR | Nestle price impact (-1.4%) |
| Final Amount (In SGD) | 943 SGD | Converting MYR to SGD in Oct (1SGD = 3.24 MYR) |
On the other hand, while the SGD is strengthening against many currencies, some currencies such as the USD, are strengthening more.
In the case of US, a falling SGD would help boost the domestic currency returns of oversea investments. As a result, investors who are now holding US equities or USD would have benefited from currency movements.
The above is based on the assumption that you already possess the foreign asset. What if you have SGD stashed away?
If you still possess SGD, the appreciation of our home currency means you can buy more foreign assets for the same price as in the case of Nestle, whereas the depreciation of our home currency means you can buy fewer assets, as in the case of US stocks.
So should you then buy more Malaysian stocks or other currencies that have depreciated against the Singapore dollar? No.
For one thing, the currency may continue to devalue, reducing your future return. So whether you buy or not is determined by your long-term outlook on the country.
2) Reduced corporate earnings
Rising currencies may also directly boost corporate earnings in one country while hurting them in another. This is mainly determined by where the company makes its money, whether at home or abroad.
In general, as a country’s currency appreciates, the share prices of companies with most of their sales in their home countries outperform those with operations overseas. According to a survey by Goldman Sachs, in 2022, US-centric companies were down an average of 15% during the slump, compared to a 24% decline for companies with a higher percentage of international operations.
This impact can be explained further with Nike, which recently published its most recent quarter.
Nike, as you may be aware, sells shoes and has operations all over the world. Such product is often sold in local currencies, so let’s take an example of its operation in Europe. Suppose Nike sells a pair of shoes for 100 euros. In that case, the depreciation of the euro means that less can be converted back to USD (Home currency), forcing the company to record a lower revenue generated.
From Nike annoucement:
- Revenues were $12.7 billion in the first quarter, up 4% from the previous year and 10% on a currency-neutral basis.
- Gross margin fell 220 basis points to 44.3%, primarily due to higher freight and logistics costs, lower margins in our NIKE Direct business due to higher markdowns, and unfavorable changes in net foreign currency exchange rates, including hedges, which were offset partially by strategic pricing actions.
As shown in the accompanying table, excluding its domestic sales in North America, Nike’s overseas division has had its income considerably impacted by currency fluctuations (where most currencies have depreciated against the USD).
Without currency fluctuations, it would have increased its revenue by 17% in Europe. However, due to currency fluctuations, we only observe a 1% increase.
Nike is not the only one hurting from the rising value of the US dollar. Many US corporations with foreign operations, such as Microsoft, have begun to issue weaker expectations and more dismal profits, causing a sell-off. Along with other concerns such as inflation (increasing costs) and continuous supply chain uncertainty, we may see a slowing or even a fall in revenue growth in the future.
Returning to Singapore, with our SGD appreciating, it would imply the same thing. Local firms with businesses here may be in a better position than those with operations in Malaysia, Japan, or Europe, for example. Stocks like Ascendas REIT, which has assets all over Europe, may face a drop in revenue after converting back to SGD.
What to do?
1) Diversification
In the long run, a diversified portfolio will help reduce portfolio volatility. You would have heard not to put all of your eggs in one basket and to diversify your investments across several asset types. When one asset class falls, it can be offset by improved performance in others.
This holds true for stock investments as well.
Besides investing in one geographical location, investors can consider spreading their assets in multiple. Apart from that, you should also understand where these companies generate their revenue from.
Consider the S&P500: it is natural to expect exposure to the US market and its currency. Generally, this is the case, but here is the thing. While it is formed of over 500 firms domiciled in the US and is often regarded as one of the best gauges for the US equities market, not all revenues come from the US.
Indeed, foreign markets account for approximately 29% of S&P500 revenue. This is an aggregate of 500 companies, and the percentage would fluctuate from company to company. Nike, for example, generates only 46% of its income in the United States, with the remainder coming from Europe, China, and Asia.
As a result, when investing, you should consider not only where the firm is listed but also where its operations are located.
As a general rule, investors can expect a boost to their overall return by investing in companies whose income is denominated in an appreciating currency. On the other hand, a falling currency may reduce one’s profit. Thus, it would be best to position yourself in stocks denominated in USD rather than Malaysia Ringgit or Renminbi, for example. Nevertheless, investing in equities is already difficult, and adding forex timing would be an additional level for investors to understand. As a result, a much simpler way would be to diversify your stocks in different geographical locations.
Of course, FX is only one component; another is the stock return. Should the return in stock appreciation exceed the forex’s impact, the trade-off may be worthwhile.
2) Do nothing
Another strategy is to do nothing. The good news, companies frequently hedge against currency fluctuations. So while there may be some short-term shock, it should eventually level out.
Currency hedging efforts at Nike have occasionally helped enhance gross profit margins, recouping some of the lost income.
Some businesses may even offset their losses from selling in local currency by producing elsewhere, particularly in Asia. This allows them to recoup part of their lost income through lower manufacturing costs.
All in all, investors just need to be aware of this currency risk and understand how it may impact the firm. From there, you’d want to see if the organization has any risk management in place to reduce volatility caused by currency fluctuations.
Time to reexamine your portfolio
Currency fluctuations are not the only reason investors should be concerned. We would usually assess the company’s profitability, financial health, and future outlook. However, if neglected over time, it may unknowingly undermine an investor’s gains.
Moving forward, we should reexamine our portfolio to see which currencies we are exposed to and understand how we might potentially reduce this risk.
Nevertheless, FX risk is not a reason to avoid investing overseas. More often than not, investing oversea exposes investors to fresh options such as growth stocks. What you need to determine now is how much risk you are willing to take while investing abroad.
