Wong Kah Meng
KUALA LUMPUR: A basic-but-powerful strategy to adopt in the current declining interest rate environment would be diversification, Funding Societies Malaysia highlighted.
It pointed out that the prospect of a low global interest rate environment is expected to continue to place downward pressure on traditional investment assets as lingering geopolitical risks, moderate global economic growth, mounting debts and lower commodity prices serve as challenges facing the world’s financial markets. These, along with yet-to-be-identified events will invariably continue, and investors resolve will be tested.
It advised that diversification beyond stocks and bonds is required due to increasing correlations between these asset classes. Increasingly interconnected markets mean that traditional asset classes and geographic diversification no longer provide the downside protection that investors expect.
Diversification also helps investors mitigate volatility and take advantage of opportunities across an evolving set of asset class portfolios.
Alternative investments, such as peer-to-peer (P2P) investment for instance, have a lower correlation to traditional stocks and bonds, which can be a tool to mitigate market volatility and losses in the long run.
Funding Societies Malaysia co-founder and chief executive officer Wong Kah Meng said: “P2P financing allows investors to support the growth of local SMEs by providing them an alternative source of capital to fund their business expansion.
“In return, investors can earn interest rates of up to 14 per cent p.a. after fees but before defaults. By investing in P2P platforms, investors are able to diversify their portfolio into an asset class that have lower correlation to traditional financial markets, hence improving their portfolio’s risk-adjusted returns.”
He added, “Further, we expect P2P investing to become more appealing to investors given the current low interest rate environment.
“While traditional asset classes, such as fixed deposits and bonds are now offering lower interest rates, we expect the returns from P2P investing to remain relatively stable.
“In addition, given the current global macroeconomic environment, there is greater volatility and correlation amongst traditional investment options and hence, P2P investing could play a key role in the diversification strategy for investors.”
Of note, Malaysia’s central bank, Bank Negara Malaysia (BNM) had already announced a 25 basis points (bps) cut on overnight policy rate (OPR) to three per cent earlier in May amid signs of tightening financial conditions that are directly affecting the country’s foreign direct investments.
Equally affected is Malaysian ringgit, as it was dragged to its lowest level in almost two years, with global equity markets including Bursa Malaysia equally punished – resulted in the FTSE Bursa Malaysia KLCI to decrease 117 points or seven per cent to the lowest point of 1551 in 2019 from 1668 since the beginning of 2019.
Back in 2016, the Securities Commission Malaysia (SC) became the first in Southeast Asia to introduce P2P financing along with a regulatory framework. Hence, an ‘alternative’ financial instrument emerged as a new way of investment for Malaysian investors.