Home in Malaysia. Business in China. Investments in UK. Kids in Australia. If you live a borderless life, it’s time to incorporate foreign currency considerations into your savings and wealth planning.
As the world gets more connected and borders continue to open up, more and more of us are calling more than one country home.
Dan*, a Malaysian, moved together with his wife and daughter to Singapore when the daughter started Year 7 for school. While the daughter has gone to the UK for boarding school now, Dan and his wife continue to live in Singapore. Throughout this time, the family has maintained a home in Malaysia and one in Singapore as well. Dan shuttles weekly between Singapore and Kuala Lumpur where he still owns several businesses, while his wife splits time between Singapore, Kuala Lumpur and London, where they also maintain a residence.
Tim*, an American married to a Malaysian, calls Kuala Lumpur home. He also calls Singapore home as well. He maintains a home there because he spends quite a lot of time working out of Singapore, and also spends almost six months out of the year travelling globally for business. Because of his highly global and mobile life, Tim maintains offshore accounts to meet his global financial needs.
Pamela*, a Malaysian, moved to Sydney with her two sons as they entered high school so that the children could continue their education in Australia.
The family bought a home in Sydney and Pamela started a business when they arrived. Since then, the family has also invested in other properties in Australia where the children will stay on after graduating from university as permanent residents. Meanwhile, the husband who owns a business in Kuala Lumpur, has stayed back in Malaysia to manage the business and flies to Sydney every couple of months to spend time with the family.
Whether you are a Malaysian or an expatriate, there is a good chance your life is no longer one country-centric–meaning, for example, your life no longer consists of having only property in Malaysia, bank savings in Malaysian Ringgit, stock investments in Malaysian-listed companies alone, income derived solely from Malaysian sources, debts in Malaysia, or living in Malaysia year-round.
If you are such a global citizen, whose life spreads across different countries, your financial needs would be different. Managing and planning your foreign currency needs beyond just the Malaysian Ringgit would probably rank quite high on your list of financial priorities.
Fluctuating global currencies are a constant in volatile international capital markets.1 Whether it’s building sufficient savings to send your daughter to university in the UK, or accumulating enough money to put the down payment on an investment property in Australia, or managing the expenses of your son who is studying in the US, it is important to stay on top of foreign currency volatility so you don’t find yourself caught short. If this sounds like you, then it is essential to incorporate foreign currency considerations into your long-term savings and investment strategy.2
A good starting point is to understand the concept of “currency risk”.
Building good long-term investment results, in particular, typically requires us to assume some risk.2 However, your goal should be to maximize your investment returns without taking on more risk than is necessary to achieve those returns.2 Foreign exchange volatility is one of the risks of investing.2 While you expect to benefit from the long-term appreciation of your investment portfolio, good investment results can be diminished or wiped out in the exchange rate between the currency denomination of your investments and the currency in which you pay your bills, fund your children’s education and retire.2 This is “currency risk”.2
The good news is you can reduce and even potentially eliminate currency risk without having to settle for lower returns on your investments.2 One way to manage currency risk is to focus on matching your “life assets” and “life liabilities”.2
Life assets are financial investments and other assets that you accumulate through savings and investments with the expectation of drawing them down later in life.2
Life liabilities are the big expenses you expect to incur during your lifetime such as buying a house, paying for your children’s education and retiring.2 You expect to be able to afford these expenses by selling the “life assets” you have accumulated.2
Both these “assets” and “liabilities” have a currency denomination.2 Stocks are denominated in the home country currency of the issuer – i.e. AirAsia shares are Malaysian Ringgit denominated and Apple shares are USD denominated.2 Bonds have the currency denomination of the currency in which the bonds promise to pay their interest and redeem their principle.2 Some assets, most notably commodities and gold, are not denominated in any currency – these are traded freely in different markets and currencies globally, and their value is not linked to any particular currency.2
A Malaysian perspective
As a Malaysian planning to send your children overseas to further their education or looking to invest in properties abroad or preparing to migrate to another country, you would most likely find yourself exposed to the negative impact of currency risk if your “life assets” accumulated to fund “life liabilities” are denominated in different currencies.2
As a simple example, let’s imagine a Malaysian family that invests in a five-year time deposit yielding 4% p.a. interest compounded in Malaysian Ringgit (RM) to fund their son’s first year of study at a British university. The son will begin university in five years. At that time, the RM time deposit would have compounded to produce a 22% return. However, if in the meantime, the British Pound (GBP) has appreciated 22% against the RM, the investment gain in terms of GBP would be zero.
Because the son has chosen to study in the UK, where tuition and other expenses have to be paid in GBP, the appreciation of the GBP over the five years would effectively offset the increase in the value of the RM time deposit. As a result, the actual buying power of the RM time deposit, measured in GBP, will be the same at the end of five years as it was at the beginning of the five years.
In contrast, the appreciation of the GBP against the RM would have no negative consequences for the family’s university savings plan if the son decided to attend a local university instead. In this case, the time deposit would have generated 22% more “university expense” buying power at the end of five years.
From this example, if the family had considered investing in a GBP time deposit at 4% p.a. over a 5-year tenure to pay for their son’s university, they would have potentially gained 22% more “university expense” buying power in the UK.
In this scenario, the two time deposits were essentially different investments.2 The investment “asset” needed to be matched with the university expense “liability”, and if it had been done correctly, currency risk would have been eliminated from the family’s university savings plan.2
Hedging for the future
If your plan for your family’s future extends beyond Malaysia’s borders, thinking through the currency denomination of your “life liabilities” is a good starting point for choosing the currency denomination of your investment portfolios.2 So, if you are planning to send your children to Australia for their university education and intend to join them in the future and retire there, then your investment “asset” should be primarily Australian Dollar (AUD) denominated.2 Your investment portfolio should be heavily orientated towards AUD stocks and bonds and your savings should be in AUD denominated bank accounts and time deposits, even though you are living in Malaysia.2 In this way, you are matching your “liabilities” with your “assets”.2
Of course, you may not have a clear idea of your plans for the future yet, or which part of the world life may take you and your family.2 In this case, you have to make projections on the most likely possible scenarios and build a savings and investment portfolio that is diversified across a variety of currencies so that your future decisions are not constrained by large changes in relative currency valuations.2 You want to avoid being “tied” to one currency if your geographical future, and thus your “life liabilities”, are uncertain.2
Whether you already have concrete plans for the future or are still undecided, you can diversify your foreign currency denominations and potentially lower your currency risk with a multi-currency account like HSBC’s Everyday Global Account. Introduced recently, this all-in-one account provides you with the convenience of diversifying your foreign currency holdings for savings needs in foreign currencies or future foreign currency investment plans you may have in eight major global currencies in one account.
With access to 24/7 currency conversions and real-time foreign exchange rates, as well as instant online transfers between your global HSBC Premier accounts, you will be able to manage your foreign currency needs better and more efficiently.
To find out more about HSBC’s Everyday Global Account, speak to your Relationship Manager or visit your nearest HSBC branch today.