Sunday, September 5, 2010

Outward Investment: EPF And UK Property

I was struck by the juxtaposition of the articles on property in yesterday’s Star. On the one hand we have news of oversupply and softening rental yields in the KLCC Condo market (here, here and here), in stark contrast with the news that the Employees Provident Fund (EPF), the country’s largest fund manager public or private, is committing to invest GBP1 billion in the UK:

Should EPF house our money in real estate abroad?

IT’S as predictable as clockwork.

Any move by the Employees Provident Fund (EPF), unless it’s glaringly positive, tends to set off warning sirens. Much of it has to do with the fact that the employed, 12.4 million of them, have no choice but to channel part of their hard-earned savings to the fund, hence the perceived-right to voice dissent or concern.

There’s also the “legacy stigma” that now and then rears its suspicious head, that the EPF, with its bursting wallet, may be acting in ways that are not in sync with the pillar on which it was set up almost two decades ago – to safeguard the people’s retirement monies.

So, when it was recently revealed that EPF plans to tuck some £1bil (or 1.2% of its total investable sum) primarily into commercial properties in UK, the vibes were multi-pitch.

Now obviously, with the number of stakeholders that EPF has there’s going to be questions – as in this article. But I happen to think it’s a pretty positive move (and the consensus agrees).

For one thing, as bubbly as Britain’s property market was before the recession, it’s also one of the markets that has fallen the most. The stronger Ringgit helps as well, which greatly increases EPF’s firepower. But most of all, I think the UK’s policy mix is probably the most potent in terms of engineering a recovery. You have a massively expansionary monetary policy coupled with fiscal consolidation, and a sharply depreciated currency – the last time the Pound was this low was in the early 90s, just after the forced exit from the European Exchange Rate Mechanism (ERM). If I had to bet, I would say of the crisis countries Britain has the best chance of recovering the furthest and the fastest. The US is hampered by the Dollar’s role as the global reserve currency, and the Euro area has coordination problems.

Unless EPF’s picked estate managers completely screw up, I can’t see a way for EPF (and by extension the Malaysian worker) could lose on this move – overshooting is common among crisis currencies, so a recovery would boost yields even if property values don’t recover too much.

Why not invest in emerging economies as well? Because property prices in places like China, Singapore and Hong Kong are highly volatile (read: risky). And Australia I think is overvalued. Given its mandate for capital preservation, the UK isn’t a bad place to invest, if you had to invest somewhere else.

Coming back to the title of this post, EPF’s investment will obviously involve a capital outflow from Malaysia, reinforcing the trend seen in the last decade. But again, I don’t necessarily see this in a negative light – we’re now a creditor country, which is a better position to be in than being a debtor country as we have been for most of Malaysia’s 53 years.

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