The US dollar recorded its best annual performance since 2015, gaining nearly 7% in 2021 against a basket of major currencies, as measured by the US Dollar Index. We had previously explained in some detail why we had expected this very outcome throughout the past year, which was also the reason our Global Portfolio was heavily weighted in US stocks.
For a brief recap: Demand for the greenback was supported by robust recovery in the US economy — relative to the rest of the world — and corporate earnings, which, in turn, drew investors to US stocks. The Standard & Poor’s 500 index was among the best-performing indices in the world, up 26.9%, in 2021. The resurgence of Covid-19 cases in various parts of the world further spurred demand for the US dollar as a safe haven.
We think many of these factors remain in play in 2022. In fact, we think fallout from the pandemic has shifted, to a degree, growth momentum from emerging to developed countries. For a more in-depth discussion, please refer to our article in The Edge titled “The next big themes: Supply chain resilience and the end of low-wage as a competitive tool” (Issue 1394, Nov 1, 2021).
In addition, supply chain disruptions are being prolonged by the latest surge in Covid-19 cases, this time attributed to the Omicron variant. While the effects of this variant appear to be less deadly — due to protection from vaccines, immunity from previous infections and perhaps because Omicron has evolved to be a less virulent strain — its highly contagious nature is resulting in more sick days and worsening the labour shortage.
Persistent supply chain disruption is, in turn, keeping inflation higher for longer than originally anticipated, prompting the US Federal Reserve to all but give up on its “inflation is transitory” narrative. As a result, the central bank is accelerating the paring back of its bond purchases, now expected to end sometime in March 2022. Soon thereafter, the Fed is expected to start raising interest rates — currently projected to be by as much as 75 basis points this year — from the current 0% to 0.25% range. This is sharply higher than its projection several months back. In essence, the US is expected to be among the most aggressive of the world’s major central banks to begin reversing ultra-loose monetary policy. Higher comparative yields should underpin continued strength in the US dollar — including against regional currencies. Rising interest rates in the US could hurt the recovery in developing countries.
As seen in Chart 1, the greenback gained against all major currencies in the region last year. The Malaysian ringgit too traded weaker, ending at 4.165 against the US dollar from around 4 at the start of the year. That said, it performed better in the last few months, stabilising from mid-August through November and noticeably strengthening in December (see Chart 2).
This was most likely driven, in part, by the reversal of foreign fund outflows, following intense selling pressure, especially around April to early August 2021, which coincided with the worst outbreak wave and renewed lockdown in the country (see Chart 3).
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Part of the recent ringgit strength might also be attributed to increased income repatriation by corporates. We think companies have brought back more foreign-based income than usual, to avoid additional taxes that were announced in Budget 2022, at end-October. It was proposed that all foreign-sourced income remitted back to the country would be taxable, effective Jan 1, 2022. Note that on Dec 30, the government announced exemptions for individuals and companies receiving dividend incomes.
There was a noticeable spike in banking system deposits by businesses in November — and we suspect for December as well. (The data will only be available at the end of this month.) This additional demand for ringgit would have contributed to the strengthening of the currency (see Chart 4). But it also means a weakened outlook for the ringgit in the medium term — in the absence of this demand source, against the backdrop of a stronger US dollar.
On the local bourse, a weaker ringgit is positive for export-oriented businesses, including commodity producers such as plantation companies, and negative for those heavily reliant on imported raw materials. Indeed, this is one of the key themes in selecting our top 10 stocks for 2022. Incidentally, our Top 10 Portfolio for 2021 gained 30.6%, on average, well ahead of the 3.7% and 3.9% declines for the FBM KLCI and FBM EMAS indices respectively. For more information on this year’s Top 10 Portfolio, visit www.absolutelystocks.com.
As mentioned above, we continue to favour US stocks in the short to medium term, based on expectations of relative strength in the US economy and dollar. According to data provider FactSet, earnings for the S&P 500 companies are forecast to grow by a very decent 9.2% this year, although they are modest compared with the estimated 41.5% growth in 2021. Earnings per share, on average, have far exceeded pre-pandemic levels. Net profit margin is estimated at 12.8% in 2022, which will be the highest since FactSet started tracking the metric in 2008, despite concerns over rising wages and costs.
To be sure, valuations are high by historical benchmarks. There will likely be increased volatility and investors may want to pare back on risks, to minimise potential losses. However, even with the Fed withdrawing pandemic-era stimulus, there remains significant liquidity in the financial system. Importantly, US consumers and businesses are, generally, in a relatively good financial shape, thanks to the massive socialisation of private debts in the past two years.
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We added Grab* to the Global Portfolio late last year. The stock has fared poorly since its debut on Dec 2, 2021. We think the prospect for gains is good — with limited downside risks — from current levels. The Global Portfolio remains fully invested following this latest acquisition.
The Global Portfolio fell 1% for the week ended Jan 5, faring slightly better than the MSCI World Net Return Index. The biggest losers were tech-related companies — ServiceNow (-12.5%), Adobe (-9.6%) and Microsoft (-7.5%) — that were hit by rising yields. On the other hand, financial stocks, including Wells Fargo & Co (+7.9%) and Bank of America (+5.7%), fared well, as did General Motors Co (+9.6%). Last week’s losses pared total returns since inception to 64%. Nevertheless, this portfolio is still outperforming the benchmark index, which is up 63.1% over the same period.
*Tong Kooi Ong is related to Anthony Tan, co-founder and CEO of Grab
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
Photo: Bloomberg
