Inovatif

Category: Investments

  • Prioritising The Hereafter, Conventional VS Islamic

    Prioritising The Hereafter, Conventional VS Islamic

    In 2017, as I was just about to leave recital class, my ustazah asked a random question: “Aisya, what kind of funds do your clients invest in?”

    Back then I was still a unit trust agent and didn’t really thought about it thoroughly between conventional vs Islamic. So I told my ustazah that it was a combination between conventional and Islamic funds.

    “Perhaps you should only focus on Islamic funds,” she replied. That question sat with me, but I chose not to dwell on it. Not too long after that, I went to perform umrah (mini pilgrimage) and happened to be in the hotel room instead of with the entourage. I spent my time browsing through the Quran. Fate had it that the page I randomly flipped to was a verse about riba (interest).

    Then it hit me: what was the message I was supposed to comprehend, here at the Holy land about conventional vs Islamic? That was when my curiosity was piqued.

    After the trip, I sat for my CFP and IFP exams within a year. Unfortunately, as much as the modules had taught us theories about riba, gharar and usury, there wasn’t a chapter about here and hereafter implications on financial planners for offering conventional products instead of Islamic products to our clients.

    We are what we eat, right? In Islam, we are what we earn, too. As the years went by, I had accumulated endless burning questions that nobody could answer. Finally, in early 2021, I had the opportunity to consult a reputable Shariah scholar. After our consultation, I finally saw light at the end of the tunnel.

    These are some of the changes I have embedded into my life, including paradigm shifts that I have also been sharing with my clients, and now with you.

    Conventional VS Islamic Are The Same

    Let’s address the elephant in the room. If Islamic banks, Islamic asset management companies and takaful providers are all leveraging on its conventional arms’ back-end offices, systems and talents, then their Islamic arms cannot be that halal, can they?

    Well, if we dig deeper, one additional step required for the Islamic arms would be to get mutual consensus from their internal Shariah Committee before each Islamic product is submitted to regulators and its Shariah Advisory Council for approval.

    Imagine this: if chicken rice can have different recipes and ingredients from different sellers, how do you make a decision as to which chicken rice shop to buy from? The main ingredient is still chicken; isn’t chicken halal?

    Choosing halal doesn’t mean it will be risk-free. It just removes the risks that you have yet to see. For those who resonate with this, if we insist on consuming halal meals when we are abroad or at home, don’t you think we should be doing the same for banking and investing?

    Conventional VS Islamic: Converting To Shariah EPF

    For Muslim readers, have you shifted your conventional EPF to Shariah EPF? If you are thinking: “But I can pay zakat for the profits received from conventional EPF, right?”

    I’m here to tell you that that’s a misconception. Zakat can only be paid when your source of income is free from riba, gharar and usury.

    Incorporating Islamic Solutions Into Your Everyday Life

    There are limited Islamic credit cards with good perks in the market. But there is one worth mentioning. If you are currently using a Maybank credit card, Maybank allows you to switch to Maybank Islamic without affecting your credit limit and credit score. The migration is free and you will still have access to the Treats Points facility.

    A good reason to shift even though you may be paying your credit card in full every month is because riba still exists in all of your conventional cards’ transactions, under what is known as merchant fees. Next, what about your current and savings accounts? Your children’s? Your CDS accounts? What about crypto? The answer is to shift, shift and shift.

    Limitations In The Financial Technology Sector

    There are still many fintech and do-it-yourself platforms out there offering many one-size-fits-all types of accounts. What MIDF Invest has done right is to offer both conventional and Islamic accounts to its investors. This feature is fantastic because the app will only list Shariah-compliant foreign stocks and ETFs for investors who opt for Islamic accounts.

    This shows that it is possible for fintech providers to provide an option for Islamic accounts despite leaning on conventional structures, like how MIDF Invest leans on Saxo Bank.

    Conventional VS Islamic: The Pricing Battle Between Insurance And Takaful

    Until we solve this supply and demand saga, takaful providers will struggle in reducing their pricing to compete with their insurance peers. The cost of takaful plans can sometimes be twice the premium of insurance for the same amount of coverage.

    I see my clients struggling between choosing what is right for their faith versus affordability. Let’s face it, everyone needs sufficient coverage, but how do we guide our clients to choose what is best for them if pricing can sometimes get in the way?

    Islamic Finance Is For All

    One misconception I often come across is the belief that Islamic finance is only for Muslims. One of the strengths of Islamic finance is that it reduces and eliminates exposure to gambling, alcohol, entertainment, banking, companies with high gearing and more in its product mix.

    It forces you to go back to your risk appetite: what do you envision having in your investment portfolio and ultimately, everything else in life?

    Going Above And Beyond Our IFP Certification

    At the current time of writing, there are only 363 Islamic Financial Adviser Representatives registered under Bank Negara Malaysia (BNM). We are still a minority in the market. Here’s something I’d like my fellow colleagues to ponder upon:

    “How are we upholding our IFP certification and license?”

    See, the IFP mark isn’t just a mark on our names and business cards. It isn’t just about providing Islamic financing, Islamic funds and takaful to our clients. For me, Islamic financial planning is a way of life. We uphold the practice here, pave the way for our clients to pursue the same so that it becomes part of our hereafter and theirs.

    Conventional VS Islamic: There Is More To Life Than Just Dollars And Cents

    There are certain things in life that we cannot quantify. There are decisions that we have to make that go beyond the usual tangible ROI. Make the intangible ROI your compass, and see what kind of blessings come knocking on your door.

    I want to call upon those who serve from your hearts, to be the light to those around you. In a world where things are about revenues and returns, how do we draw the line between what’s right for us, our clients and our Creator?

    “Life is about making choices, so why not make our financial choices a win-win for our journey here, as well as in the hereafter?”

    Hope we all now have a greater conscience when it comes to conventional vs Islamic, especially if you are a Muslim.

    About the Author

    Aisya is an Approved Financial Adviser from Harveston Financial Group as well as a HRD Corp Registered Training Provider. She shares financial literacy content on her Instagram @aisyarahman.advisory daily on a variety of financial topics. Aisya can be reached at aisya@aisyarahman.com.

  • AOB: Audit Committees Must Ensure Integrity of Financial Reporting

    AOB: Audit Committees Must Ensure Integrity of Financial Reporting

    The Securities Commission Malaysia’s (SC) Audit Oversight Board (AOB) has called for Audit Committees of public listed companies (PLCs) to create and maintain an environment that supports and upholds auditors’ independence and high audit quality to ensure that reliable audited financial information is made available to facilitate informed decision by users.

    At a recent virtual dialogue series with 823 Audit Committee members from 723 PLCs, the AOB reminded that members of the Audit Committee are instrumental in setting the right tone for the company’s financial reporting process and enabling a close working relationship between the Audit Committee and the independent auditors. It further emphasised that effective oversight by strong, knowledgeable, and independent Audit Committees shall further enhance audit quality in the marketplace.

    Recognising this, the AOB regularly engages with Audit Committees to ensure that they are adequately informed and kept abreast with the relevant information to effectively carry out their oversight responsibilities. This year’s dialogue series also saw the AOB sharing the result of its survey on ‘Transparency Reporting by Audit Firms’, which is based on the responses of 151 Audit Committee members.

    Introduced in December 2019, the Transparency Reports are issued by certain registered audit firms who meet the mandatory reporting criteria as stipulated by the AOB. The Transparency Reports provide information on a firm’s legal and governance structure, measures taken by the firm to uphold audit quality and manage its risks, as well as
    information on the firm’s measurement of audit quality indicators.

    The AOB noted that while 89% of the survey respondents are aware of the requirement for audit firms to produce Transparency Reports, only 68% of the respondents have read the Transparency Reports.

    The AOB strongly encourages Audit Committee members to read the reports in view that 94% of the survey respondents who have done so have found the information disclosed to be useful to facilitate a more effective selection and assessment towards appointment (including re-appointment) of the external auditors. For good corporate governance, the decision for the appointment or re-appointment of auditors shall be made by the Audit
    Committees and not management.

    The recently concluded dialogue series, held on 17 November and 6 December 2022, reflects the SC’s efforts to improve corporate governance in PLCs as well as strengthen the ecosystem for audit quality and increase investors’ confidence in the quality and reliability of audited financial statements.

    It also provides a platform for Audit Committees to raise any issues with respect to their oversight function and to share good practices in supporting audit quality.

    About the Securities Commission Malaysia:

    The Securities Commission Malaysia (SC), a statutory body reporting to the Minister of Finance, was established under the Securities Commission Malaysia Act 1993. It is the sole regulatory agency for the regulation and development of capital markets. The SC has direct responsibility for supervising and monitoring the activities of market institutions, including the exchanges and clearing houses, and regulating all persons licensed under the Capital Markets and Services Act 2007. More information about the SC is available on its website at www.sc.com.my. Follow the SC on twitter at @SecComMy for more updates.

    About the Audit Oversight Board:

    The Audit Oversight Board (AOB) is established under the Securities Commission Malaysia Act 1993 which came into force on 1 April 2010 to promote and develop an effective audit oversight framework and to promote confidence in the quality and reliability of audited financial statements in Malaysia. More information about the AOB is available at www.sc.com.my.

  • SC Unveils Principles-Based Sustainable And Responsible Investment Taxonomy For The Malaysian Capital Market

    SC Unveils Principles-Based Sustainable And Responsible Investment Taxonomy For The Malaysian Capital Market

    The Securities Commission Malaysia (SC) today unveiled the Principles-Based Sustainable and Responsible Investment Taxonomy for the Malaysian Capital Market (SRI Taxonomy) to help advance the nation’s climate and sustainability agenda.

    The SRI Taxonomy provides universal guiding principles for the classification of economic activities that qualify for sustainable investment.

    It aims to give clarity towards enabling proper and consistent identification and classification of various types of economic activities as well as the definition of sustainable investments. It also seeks to address concerns on the need to mitigate
    and manage the risks of greenwashing.

    “The global expansion of sustainable investments has created demand for additional clarity and assistance for market players in identifying economic activities that are aligned with environmental, social and sustainability objectives,” said the SC Chairman
    Dato’ Seri Dr. Awang Adek Hussin.

    “The SRI Taxonomy adopts a principles-based approach to enhance the standardisation and comparability of sustainable investment assets,” he said. “This was done after considering the state of readiness of the wider Malaysian capital
    market, as the capital market constituents are at different maturity levels in their sustainability journey.”

    Given Malaysia’s strong position in Islamic finance and the alignment of the underlying principles of Islamic finance with sustainability, particularly from the social and ethical investing perspectives, the SRI Taxonomy also includes a social component, in addition to the environmental component.

    The development of the SRI Taxonomy was undertaken by the SC, in collaboration with the industry through an Industry Working Group (IWG). The IWG comprises the World Bank Group Inclusive Growth and Sustainable Finance Hub in Malaysia as the Lead Technical Expert, and representatives from Bursa Malaysia, asset and fund management companies, investment banks, asset owners and other sustainable finance specialists.

    The World Bank Country Manager for Malaysia Yasuhiko Matsuda said, “We are grateful for this opportunity to have supported the SC in developing a framework to aid in unlocking capital for sustainable development priorities. This taxonomy can also assist other countries facing similar challenges in shifting or transitioning towards socially responsible investments and a just climate transition.”

    The SC also issued a Public Response Paper today following the issuance of the Public Consultation Paper No.1/2021 on the Principles-Based Sustainable and Responsible Investment Taxonomy for the Malaysian Capital Market in December 2021.

    Both the SRI Taxonomy and the Public Response Paper can be found at the SC website at https://www.sc.com.my/development/sri.

    About the Securities Commission Malaysia:

    The Securities Commission Malaysia (SC), a statutory body reporting to the Minister of Finance, was established under the Securities Commission Malaysia Act 1993. It is the sole regulatory agency for the regulation and development of capital markets. The SC has direct responsibility for supervising and monitoring the activities of market institutions, including the exchanges and clearing houses, and regulating all persons licensed under the Capital Markets and Services Act 2007. More information about
    the SC is available on its website at www.sc.com.my. Follow the SC on twitter at @SecComMy for more updates.

  • Reevaluating ESG And Cryptocurrency In The Context Of Modern Money

    Reevaluating ESG And Cryptocurrency In The Context Of Modern Money

    Environmental, Social, Governance (ESG) refers to the purpose of environmental, social, and governance aspects to measure how far along businesses and nations are with sustainability. The question is, does ESG and cryptocurrency align?

    Last year, Bloomberg Intelligence predicted that Global ESG assets are on track to hit USD53 trillion by 2025 (a third of total Global Assets Under Management). Approach to social and environmental issues offers a particularly compelling picture of how ESG analysis may aid to improve currency investment and understanding of ESG and cryptocurrency in the area of modern money.

    Deutsche Bank analyst provide an explanation on how ESG can be further understood in this area particularly regarding Fiat money and Crypto to being the possible ESG assets. It was observed that Fiat money is known to have issues towards the environment and can be considered to have a far greater but much subtle problem.

    In addition, the influence of national policymakers to manufacture money through quantitative easing made central bank-backed currencies as the ultimate tool in bringing forward consumption from tomorrow to today, which also made it unreasonable to be accepted as ESG asset.

    Similarly, there are considerable dangers associated with cryptocurrencies, particularly for prudent investors. The usage of virtual currency for illegal purposes is nevertheless widespread. According to Chainalysis, a Cryptocurrency monitoring firm, despite its transparent and traceable architecture, Bitcoin is still appealing to criminals because of its pseudonymous nature and the simplicity which enables users to move money immediately anywhere in the world.

    Read: Be Wary Of Crypto Scams In Malaysia

    Can ESG And Cryptocurrency Align?

    As cryptocurrencies become more popular, some people are becoming concerned with the conflict of values between ESG and cryptocurrency especially regarding how much energy is being used in the mining process. The analysis report from Betterment estimates that just Bitcoin mining alone uses more power than several nations consumption.

    The energy required to mine cryptocurrencies is tied to fossil fuels, which might increase greenhouse gas emissions. However, some might think otherwise as carbon impact of bitcoin mining is also decreasing particularly since China this year outlawed private coins and shut down massive mining operations.

    Newer blockchains might even reduce the energy requirements of conventional central payment systems, providing encouragement that distributed ledger technology may help to effectively tackle climate change. For instance, the Crypto Climate Accord seeks to decarbonize the cryptocurrency industry by 2030.

    Jan Kregel, Director of research at the Levy Economics Institute at Bard College in New York pointed out that a worse disaster than the subprime crisis might result from the Cryptocurrency market. According to him, although Crypto is not suitable in the ESG asset portfolio, the underlying technology (blockchain) is most likely to be accepted as ESG asset.

    With all of these obstacles, in the context of ESG and cryptocurrency especially Bitcoin is doomed. This is due to its energy-heavy proof-of-work model. However, investors are told to be cautious in putting cryptocurrencies on par with fiat money, though both are dreadful on the ESG side.

    Read: Crypto Investment: A Very High Risk Game, Are You Sure You’re Up To It?

    ESG And Fiat Versus ESG And Cryptocurrency

    Some of the ESG arguments against cryptocurrency could also be said of fiat money. For example, Scott Eichler of Standing Oak Financial, argue that 80% to 90% of fiat money has traces of cocaine on it. On the other hand, Coinshare’s 2019 analysis of the energy used by the bitcoin network suggested that 74.1% of the electricity it used then came from renewable sources.

    The average lifetime of USD5 and USD10 Fiat money notes, according to the Fed, is thought to be five years. In addition to electricity, the production of fresh banknotes and coins requires water, wood pulp, cotton, different metals, linen, and other natural resources.

    Hence, how effective are ESG reporting since ESG sometimes seems to contradict itself, especially in relation to virtual assets such as cryptocurrency?

    Fossil Fuel And Cigarette Company Tops In ESG Ranking?

    Source: Twitter

    Back in May 2022, Co-founder of Tesla and SpaceX owner Elon Musk, claimed ESG is a fraud according to his Twitter. Both the oil behemoth Exxon and the corporation Philip Morris that is heavily involved in the cigarette business are included in ESG funds. Due to the variety of ESG grading systems, the reality of ESG investment can become even more perplexing.

    Similar to this, Damodaran, a Professor of Finance at the Stern School of Business at New York University- agreed with Musk. He argues that ESG is not just an error that will cost businesses and investors’ money, while also making the world a poorer place. He added that it does more harm to society than benefit.

    “Why is ESG being marketed so vigorously? Because of the ESG gravy train, which is funded by investors and taxpayers, includes accountants, measurement services, fund managers, and consultants. Corporate CEOs are embracing ESG because it liberates them from all required responsibility”, according to Damodaran.

    Damodaran statements appears somewhat true when an online survey done by Betterment, who hired 1,000 individuals who own taxable investments to participate in a survey to determine who is and who is not investing in ESG and why. The findings show ESG investors also hold cryptocurrencies, which have also raised environmental concerns due to energy consumption.

    80% respondents of those who hold ESG-themed investments also hold crypto investments. In comparison, just 22% of those without ESG-themed investments have crypto in their portfolio.

    In recent years, the popularity of sustainable investment have increased in part due to climate emergency and the present public health crisis. Be mindful although many would favour ESG due to the idea, trend, or the benefit it would bring, we must remember when there are financial parameter or indicators being established, there are always possible ethical drawbacks especially when it runs behind human actions.

    Therefore, ensuring ESG being managed and used properly and honestly practice is a must. And that’s why there’s a need to reevaluate ESG and cryptocurrency in the context of modern money.

    Read: Crypto And Digital Asset, Learn Before You Earn

    About the Author

    Azah Atikah Binti Anwar Batcha has an Accounting, Finance, Auditing, and Islamic Finance background. She has worked with two of the Big four firms prior to pursuing her postgraduate studies at University of Technology Malaysia (UTM), Kuala Lumpur. She can be contacted at aaabwrite@gmail.com

  • SC Issues New Guidelines and Technical Note to Enhance the Quality and Diversity of Investment Advisory

    SC Issues New Guidelines and Technical Note to Enhance the Quality and Diversity of Investment Advisory

    The Securities Commission Malaysia (SC) today released new Guidelines to strengthen the role of investment analyst firms and their analysts as a reliable source of investment information for the public.

    The SC also issued a Technical Note to provide details on the licensing requirements for those providing digital investment advice. This is in line with the SC’s agenda to create a digitally inclusive ecosystem for the capital market.

    Both developments support a key thrust of the Capital Market Masterplan 3 to provide investors with better and greater access to quality investment advice and increased diversity to meet their emerging needs through a more digitally inclusive ecosystem.

    “Investment advisers play an important role in the capital market by providing valuable insight and information for investors to assess investment opportunities. That is why the SC expects them to exercise reasonable care and diligence in providing research-related services,” said the SC Chairman, Dato’ Seri Dr. Awang Adek Hussin.

    “The SC is also cognisant of the shift in the investment advisory landscape. The emergence of digital advisory models that combine technology and investment expertise is expected to further strengthen the provision of accessible and quality advice to investors,” he added.

    Guidelines on Market Conduct and Business Practices for Investment Analysts and Their Analysts (IA Guidelines)

    The IA Guidelines outline the core principles and minimum standards that must be observed by holders of a Capital Markets Service License (CMSL) and a Capital Markets Service Representative’s License (CMSRL) who issue or promulgate research reports in carrying out the regulated activity of providing investment advice.

    Investment analyst firms and their analysts are expected to have high standards of integrity and competence in providing research-related services to ensure the objectivity and quality of their research reports and recommendations.

    They will be given a six-month period to familiarise themselves with the IA Guidelines, which take effect on 8 June 2023.

    Enabling Digital Advisory Business Models

    The SC is facilitating applicants seeking to carry out the business of investment advice through the use of automated, algorithm-based tools to meet the different needs of investors.

    With the release of the Technical Note today, a party proposing to undertake digital investment advisory services and requiring dispensation or waiver of certain licensing requirements, which include minimum financial requirements and competency thresholds, can submit an application for waiver to the SC.

    In considering such an application, the applicants are required to demonstrate how their digital innovations can benefit their targeted investors while possessing the requisite technological capabilities.

    Both the IA Guidelines and the Technical Note are available on the SC website at https://www.sc.com.my/regulation/guidelines/investment-advisers.

    About the Securities Commission Malaysia:

    The Securities Commission Malaysia (SC), a statutory body reporting to the Minister of Finance, was established under the Securities Commission Malaysia Act 1993. It is the sole regulatory agency for the regulation and development of capital markets. The SC has direct responsibility for supervising and monitoring the activities of market institutions, including the exchanges and clearing houses, and regulating all persons licensed under the Capital Markets and Services Act 2007. More information about the SC is available on its website at www.sc.com.my. Follow the SC on twitter at @SecComMy for more updates.

  • Stabilising The Unstable Stablecoins

    Stabilising The Unstable Stablecoins

    Stablecoins are in vogue, for good and bad reasons. On the bright side, by being allegedly backed one-for-one with hard currencies or near-money safe assets, unstable stablecoins hold the promise of functioning as privately produced money that could facilitate digital trade on distributed ledger technology (DLT) platforms in the future.

    To see this, one must recognise an important property that defines the acceptance of a currency: the no-questions-asked (NQA) principle. Coined by Bengt Holmström, the 2016 Nobel Economics Prize winner, NQA means no due diligence is needed on the value of currency used in a transaction. All parties in a transaction accept the money at face value – a one-hundred-ringgit note means RM100, not a cent less.

    The implication is enormous: banks will not put your transaction on hold to verify the value of your money when you wave your card to pay for a meal. Neither will the cashier waste time on physical verification if currency notes were presented. Just imagine how messily inefficient the payment system will be if otherwise occurred.

    NQA also means no delay when it comes to redemption and convertibility. All banks shall do in the face of deposit withdrawals, for instance, is to let it be. Likewise, no parties in a transaction would question an exchange of a RM100 note for two RM50 notes or ten RM10 notes upon request.

    For fiat currency, the trust is grounded upon central bank’s monopoly in currency notes issuance. For bank money, the trust is sealed by deposit insurance and access to central bank reserves.

    Unstable Stablecoins?

    Which brings us back to the viability of stablecoins as privately issued money. By what the trust on stablecoins can be underpinned? So far not much, other than the collateral in the form of cash and cash equivalents proportional to the stablecoins minted.

    Tether, for instance, describes that “Every Tether token is always 100% backed by reserves, which include traditional currency and cash equivalents. Every Tether token is also one-to-one pegged to the dollar, so USDT1 is always valued by Tether at USD1.”

    Leaving aside the fact that Tether has been sued and fined USD18.5 million for lying about its backing assets – less than 7% of its tokens were backed by cash and cash equivalents– the inner logic of a collateralised token is deeply flawed.

    Now suppose the token is genuinely 100% tied up in perfectly safe and liquid assets. That simply means stablecoins are equivalent to but no better than cash. If so, what is the point to privately create a digital token, while the job can be carried out equally well by riskless central bank money?

    But if the token is not fully backed by near-money safe assets, tokens become non-fungible, as the same tokens embody different intrinsic values when the collateralised assets are varying. Then the token users would need to consider whether to accept the token at face value in each transaction. After all, your USD1 stablecoin is not worthy of my USD1 stablecoin. This is a great example of unstable stablecoins.

    NQA Concept With The Unstable Stablecoins

    crypto

    In this context, NQA principle is violated. Stablecoins are always vulnerable to runs, and therefore hard to use in transactions. There is a familial resemblance between the Free Banking Era of the 19th century in the United States and stablecoins. By passing the Free Banking Law first in Michigan, in 1837 and last in Pennsylvania in 1860, more than a dozen of states changed the way banks were operated. Anyone could just open a bank, but with one rule: banks had to back their note issuance one-for-one with state bonds.

    Guess what? Bank notes were not economically efficient then as there was constant argument over the value of notes in transactions. NQA principle was broken, and there can’t be a functioning currency when there is no NQA.

    Later in 1863, the National Bank Act was passed. Banks that could issue national bank notes were established. Privately issued bank notes were penalised out of existence, giving way to national bank notes that ended the free banking era.

    If history is any guide, the parallel is clear: stablecoins are likely to be replaced by the coming central bank digital currencies that can also circulate on a DLT platform. No privately produced monies, however collateralised, can be as good as a properly run central bank monies.

    Unless central bank digital currencies are designed for use only among financial intermediaries, then other private digital monies like stablecoins can co-exist to serve the wider economy on retail front.

    But to transform stablecoins into the equivalent public money, the one-to-one peg to national central bank digitalcoins must be backed by central bank reserves. Stablecoins cannot become a stable currency until this occurs.

    By leveraging the prevailing well-functioning banking and payment system, another option is to tokenise the bank deposits. These tokens would represent a claim on the bank, just as a debit card holder drawing on her savings deposits does. Tokens are then backed by deposits, which, in turn, are backed fractionally by central bank reserves and deposit insurance.

    As such, fungibility is restored, and NQA principle is naturally effectuated. While stablecoins in its current form are inherently unstable, we certainly don’t want to throw the baby out with the bathwater by putting more nails in stablecoins’ coffin.

    But rather, if we believe that digital exchanges enabled by DLT platforms are here to stay and proliferate in the future, sorting out a viable form for privately produced currency that can be used to grease the wheel of digital exchanges is a more productive way out.

    We might not be far away from stabilising the unstable stablecoins.

    About the Author

    Wong Chin Yoong is a professor of economics in Universiti Tunku Abdul Rahman, and an external consultant to Max Wealth Group.

  • Global Fixed Income Outlook For 2023

    Global Fixed Income Outlook For 2023

    We now live in the era of uncertainty. The market is very volatile, where it can have wild swings that might scare even the most seasoned of professionals. This is where fixed income comes into the picture to help smoothen things up and make investing less of a wild rollercoaster ride.

    Smart Investor spoke to Dan Ivascyn, Managing Director and Group CIO of PIMCO to find out more about the global fixed income outlook for 2023. Ivascyn is leading the company’s fixed income strategies and PIMCO is an American investment management firm focusing on active fixed income management worldwide. PIMCO manages investments in many asset classes such as fixed income, equities, commodities, asset allocation, ETFs, hedge funds, and private equity.

    Dan Ivascyn, Managing Director and Group CIO, PIMCO

    Global Fixed Income Outlook For 2023

    Smart Investor: 2022 has been a torrid year for markets on the back of higher interest rates and persistent inflation. What’s your broad outlook for markets in 2023 and are we tipping towards a recession?

    Dan Ivascyn: Over the next six to twelve months, we expect to see shallow recessions and rising unemployment across many large developed markets. Central banks are determined to bring down inflation, which means tighter financial conditions and slower growth that is unlikely to
    bounce back quickly.

    We believe the return potential in the bond markets is now compelling, given how much yields have risen year-to-date. We do see downside risks for global equity markets, however, given starting valuations and earnings expectations that may not account for ongoing central bank tightening measures and increased recession risk.

    Read: Where Market Is Heading And Why I Should Not Care

    SI: Fixed income has also not been spared from the volatility as bond yields rise with the Fed staying on its hawkish path. Is the bond route over or
    should investors stay buckled up? What’s your take on the global fixed income outlook for 2023?

    DI: The global fixed income outlook for 2023 is looking quite attractive whether it is from an absolute perspective, versus cash for those that may have been on the sidelines looking to avoid the volatility, or versus equities where we see more downside risk. Given the dramatic rise in rates so far this year, we are finally at a point where we do see considerable opportunities for the patient investor, particularly in the higher quality space that should be more resilient in a recession.

    The bottom line is that valuations have changed a lot very quickly and careful investors can now go on the offense in select parts of the fixed income market.

    Read: Long-Term Bond Yields Dipped On Growing Trepidation Of A Potential US Recession

    SI: Against a backdrop of slowing growth and risks of corporate defaults, how will the team be approaching its credit selection and investment process? Which sectors are you finding attractive?

    DI: In credit markets, we seek to balance near-term caution given the uncertainty and recession risks with a long-term focus on high quality, resilient assets that may see some near-term weakening, but that we believe are highly unlikely to default. This includes a range of high quality
    structured credit assets, high quality investment grade corporate debt, particularly financials, and even some high yield credits that we believe have sufficient balance sheet resiliency over a range of adverse economic outcomes.

    We’re more cautious on areas of the credit markets that are very sensitive to the economic cycle. This includes weaker emerging market corporate exposures, lower-rated bank loans, and segments of the private credit market where weaker-quality borrowers will likely face the direct impact of higher central bank policy rates via higher debt service costs, which will likely be accompanied by deteriorating earnings power.

    SI: Why should investors consider fixed income as an asset class in their portfolios?

    DI: There are several reasons bonds make sense in a diversified portfolio. Firstly, the increase in yields globally means there is a much higher income potential in bonds than there has been in a long time. High single digit yields in high-quality bonds provide a powerful source of returns and stability, particularly compared to equities which may see more weakness in a recession.

    Secondly, current valuations mean there is the potential for capital gains as the trade-off between growth and inflation becomes more evident, potentially resulting in a Fed pivot.

    Finally, while stocks and bonds have tended to move in the same direction this year, we expect to see a return to negative correlations, meaning fixed income generally should rise in value when equities fall.

    Read: Follow These 5 Steps For An Effective Asset Allocation In Your Investment

    Well there you have it, the global fixed income outlook for 2023 by an expert.

    Building Portfolio Resilience With Bonds

    By seeking responsible sources of income that are resilient through different market environments, the Affin Hwang World Series – Global Income Fund provides investors a gateway into tapping global bond opportunities. Through a flexible multi-sector approach, the Fund balances higher yielding and higher quality assets to deliver consistent income to investors.

    The wholesale bond fund will feed investors’ money into a collective investment scheme, PIMCO GIS Income Fund, managed by PIMCO. Suitable for sophisticated investors, the Fund is offered in seven currency classes, namely USD Class, MYR Class, MYR Hedged-Class, SGD Hedged-Class, AUD
    Hedged-Class, GBP Hedged-Class and EUR Hedged-Class. The minimum investment is 5,000 for all listed foreign currency classes and 10,000 for local currency classes.

    Read: 4 Tips To Invest For Long Term

  • Should Digital Assets Be Restricted For Retail Investors?

    During the recent Singapore Fintech Festival 2022, which saw record turnout, a new digital asset was launched in the form of vouchers called “purpose-bound money”. They are powered by the Singapore Dollar backed stablecoin (XSGD) and processed on the Grab superapp, and piloted to 5000 participants with much fanfare. The vouchers were sponsored by Temasek, the best-managed sovereign wealth fund in the world.

    Many thought that digital assets were gaining the public recognition and adoption it deserves. They enthused that the year-long ‘crypto winter’ is turning into spring, as November is usually a great month for the markets.

    Two weeks later, Temasek made a shocking announcement that it had written off over RM1.2 billion in losses as its investee FTX went bankrupt. FTX was among the largest digital asset exchanges (DAX) in the world, peaking its owner’s net worth at RM430 billion. It is licensed in multiple jurisdictions and owns a licenced US bank. Its books were reportedly audited by one of the largest accounting firms in the US and advised by the Big Four global audit firms. But here we are.

    Temasek explained that it spent 8 months on “extensive due diligence” before making the investment. Fellow investors include Tier 1 venture capital (Sequioa, Softbank), hedge funds (BlackRock, Tiger Global), and multi-billionaires (David Loeb, Paul Tudor Jones) to name a few. Ordinary Singaporeans were caught in the same boat, as they were the second biggest traders globally on FTX pre-collapse, averaging 240,000 visits a month.

    The markets went nuclear. Business Insider summed up wryly: “Up-vember has turned to Nope-vember!”

    Can Retail Investors Really Manage Ultra High-Risk Assets?

    Digital assets are extremely volatile. They have crashed so many times that there is a website dedicated to counting the number of times that “bitcoin is declared dead” by news outlets. At time of writing, there are more than 460 “obituaries”. Bitcoin has dropped by 75% from its high this time last year with about RM9 trillion in value destruction across the crypto market!

    Take bitcoin for example: It has a very high level of residual risk i.e., risks that cannot be attributed to normal factors. This means that there are risks which are specifically unique to this asset class, and it is nearly impossible to be aware of or to address all risk factors.

    Based on studies, 91% of bitcoin’s risk is unexplained. In comparison, broad-based equity indices like the S&P 500 have only <1% residual risk. Individual stocks typically carry higher residual risk, but much lower than that of bitcoin. 

    Investors might take on such residual risks to serve the notion that digital assets can hedge against global market downturns, but unfortunately, this could not be further from the truth. Bitcoin might not act as a safe haven against downturns such as during the pandemic. Instead findings show that it might even amplify losses.

    Therefore, when you invest in digital assets, accepting high risk is not an option – it is par for the course. You stand to lose everything you have, and you shouldn’t be surprised by it. When a large sovereign wealth fund can lose its entire investment despite all the information access and investing tools at its disposal, what can we say for small-time investors?

    Many non-professional investors are oblivious of taking large amounts of residual risks but are unable to sufficiently diversify them away.

    Please ask yourself:

    • Do you know how to manage crypto exposures, optimize position sizes, and have the level of sophistication to do so?
    • Do you fully understand how price discovery in crypto works, and the outsized role which futures markets play?
    • How frequently should you rebalance your portfolios and what assets can you rebalance to?
    • How are you going to hedge risks when there are literally no hedging instruments offered by the DAXes in Malaysia?

    Awareness Of Risk Is Not Equal To Suitability Of Investment

    investment scams

    Investors are taught to allocate between the four main types of asset classes according to risk. You may put some into cash which tend to have the lowest risk, followed by bonds or properties, and finally into equities, which carry the highest risk.

    Some consider digital assets as the fifth asset class though it is far riskier than equities. Often there are no financial statements or real fundamentals behind them, so investors have to rely on technical analysis. Furthermore, due to the lack of regulations, ‘information asymmetry’ remains a serious and unresolved problem – investors seldom have full or fair access to the information required. Under these circumstances, value investing is very difficult.

    In the absence of corporate disclosure requirements, investors aren’t duly notified of the legal and technical threats that unfold. When all they see is the quotation board (as corporate news isn’t announced to DAXes), their decisions won’t be as informed as they should be.

    For instance: They won’t know that the latest digital asset approved for trading in Malaysia, Solana is closely related to FTX, which is currently being investigated for large-scale fraud. Or that it suffered at least five major outages since its launch, rendering it ‘unusable’.

    Or that Ripple is facing ongoing prosecution by the US SEC and has been delisted in leading foreign DAXes such as Coinbase. Or that Uniswap gets maliciously hacked every now and then, without any investor recourse.

    Digital assets bound to a single corporate entity such as FTX present a big due diligence headache as investors won’t know what hit them before it’s too late. The performance of these entities directly correlates to the performance of their tokens.

    They may behave like equity, but they are not beholden to their token holders! They are neither required to report or be transparent. Corporate controls take a backseat while their ‘moon-talk’ takes the wheel, right until the inevitable car crash.

    Digital Asset, The Choice Of So Many Youths

    Nevertheless, crypto has changed the investment dynamic. It has become a touchstone of pop culture. When you ask Millennials and Gen Zs, their first investment product is crypto even though it is the riskiest asset class! They’d place their life savings to buy illiquid artworks (in the form of NFT) even though that’s the last thing a normal portfolio will consider.

    When you ask what their objectives are, it sounds like they want to chase unicorns or catch lightning in a bottle (expect prices to magically pump). Their investment strategy is mainly to hold until it hurts – while those who sell are shamed as weak hands.

    It’s a ‘donut’ approach: Do nothing as it tracks to zero, just stare at the hole. Solana may have plunged 95% from its peak last year with no bottom in sight. But to Solana fans, it is the hill they die on.

    The point is: It is not enough to be aware of the risks – most investors already are. Awareness is one thing, but the assessment of product suitability is quite another. But are DAXes making such an assessment? Are investors being risk profiled?

    When it comes to a prolonged downturn like what is seen now in the crypto market, these investors become captive or stuck in their spot positions without ways to neutralise them or products to rotate out to.

    Will the situation worsen once IEOs (initial exchange offering) start proliferating the market? IEOs share similar characteristics with private securities offerings, which are generally reserved for accredited investors. In Hong Kong, these are classified as “complex products” which warrant additional investor protection measures (HK SFC: Guidelines on Online Distribution and Advisory Platforms 2019).

    Read: What Are Initial Exchange Offerings (IEOs) And Should I Invest In Them?

    In Singapore (where FTX is the latest storm to volley the island in a squall line from Terra Luna to Vauld to Three Arrows Capital to Hodlnaut), regulators have been repeatedly advising retail investors to stay away from crypto but was anyone listening?

    Tough restrictions are now being mulled for users to access and businesses to offer crypto (SG MAS: Proposed Regulatory Measures for DPT Services 2022). Meanwhile, HK authorities expressed relief for having “dodged the bullet” as retail investors there were barred from FTX.

    Should we take notes from our neighbours before something goes wrong?

    Read: How To Avoid Being a Victim Of A ‘Rug Pull’ Exit Scam?

    When Investors Treat Crypto As Their Retirement Plan…

    According to a Charles Schwab survey, nearly half of all millennials and Gen Zs see crypto as a viable retirement plan. This is not just a generational trend but a tech-driven one (Guardian).

    They use digital tools like robo-advisors (Accenture) and prefer to pick their own stocks (Wall Street Journal). They think financial planners are for their parents (“OK Boomer!”) and rather get their fix from social media influencers.

    Asset managers have been eager to gratify this demand. One of the world’s largest retirement funds, the Ontario Teachers’ Pension Plan for 330,000 working and retired teachers, decided to invest in FTX and is now among the biggest losers on record. Fidelity Investments, which administer pension plans for 23,000 companies in the US, has allowed contributing employees to choose bitcoin in their 401K retirement accounts.

    Here in Malaysia, there are news reports that EPF funds were taken out during the Special Withdrawal rounds to invest into crypto – despite the looming retirement security crisis. DAXes are even talking up ‘monthly deposit features’ into crypto like regular savings plans!

    There is increasing pushback, in the wake of FTX which fooled the most brilliant and vigilant asset managers. New York’s Attorney General cautioned, “investing hard-earned retirement funds in crashing cryptocurrencies could wipe away a lifetime’s worth of hard work”. US Congress is being asked to ban digital assets for individual retirement accounts as most of them “have no intrinsic value and are too unstable”.

    The same goes for investing in “digital asset companies which are a breeding ground for fraud, crime and theft” and “do not operate with sufficient guardrails to protect retirement savings” (US NYAG: Prohibiting Retirement Investments in Crypto 2022).

    Read: How Does The Greater Fool Theory Apply To Crypto Investing?

    If Investors Can’t Be Protected, They Should be Restricted

    Investors must learn to see behind the smoke and mirrors of crypto. It is 90% marketing and 10% innovation, with a probability not promise of long term value. Many are over-confident of their own research and unaware of confirmation bias.

    Even Temasek had to admit that their trust was “misplaced” in FTX. In an interview with Bloomberg, the FTX owner admitted that the concept of high returns in crypto was like a Ponzi scheme, which left the reporter utterly stunned!

    Investors need to grow up and admit that they would have missed it too.

    FTX is an unbelievably complex organization. Even the defunct Lehman Brothers which triggered the 2008 global financial crisis was less complex. FTX printed monopoly money, made investors buy it, then printed more monopoly money as collateral and took out real money loans – which it gambled away through a sister company.

    If digital assets are high-risk products that require sufficient knowledge, experience and capital, why are they not restricted to sophisticated investors – but marketed widely including to the pensioners, the poor, the uninitiated?

    The unwary masses are bombarded with outdoor billboards, online banners, radio spots, and roadshow trucks designed by award-winning agencies. Influencers are freely promoting crypto ads in the guise of financial education and luring their ‘followers’ into backroom deals.

    At the end of the day, a good investment thesis should have a strong balance sheet, risk management practices, corporate governance, and recovery mechanism. Unfortunately, this basic hygiene is nowhere in the crypto sector.

    Until this is done, if we cannot adequately protect vulnerable investor groups, then we ought to in good conscience restrict them from digital assets.

    Crypto is here to stay but regulators should ensure it’s here for good. Where there are no suitability guidelines, digital assets are not considered an alternative investment but will become the new staple.

    About the Author

    Edmund Yong
    Kevin Wong

    Edmund Yong and Kevin Wong are the partners of Celebrus Advisory, a regulation-focused consultancy for blockchain technology and digital assets.

  • A Chief Investment Officer’s View On Where To Invest In 2023

    With so many uncertainties coming our way, recession, and general election just to name a few, there’s a lot of jittery investors out there. Throw in volatility, rise of inflation, hike in interest rates, and we have ourselves a storm coming up next year.

    Not sure where to invest? Smart Investor recently spoke with Lee Sook Yee, Chief Investment Officer, Kenanga Investors Berhad to find out more about this hot topic.

    Lee Sook Yee, Chief Investment Officer, Kenanga Investors Berhad

    Smart Investor: Analysts are saying that recession is coming next year, does Kenanga Investors agree? If yes, what contributed to it and will it be even worse than previous recessions?

    Lee Sook Yee: A typical recession is characterized by declining GDP growth together with a rise in the rate of unemployment. In that respect, there is increasing likelihood that the USA and Europe will fall into a recession sometime next year.

    Looking at consensus estimates, US GDP growth will slow from 1.7% in 2022 to 0.4% in 2023. Meanwhile, growth in the European Union is forecasted to decline from 3.3% in 2022 to 0.3% in 2023.

    With regards to the causes of the recession, a cyclical slowdown in the business cycle is made worse by high inflation, tight monetary policy and geopolitical conflicts. The magnitude of recession is still uncertain, and will depend on many factors.

    Recessions in the past such as the 2008 financial crisis were driven by subprime mortgages and a subsequent liquidity crisis when Lehman failed. The issues this time around centers on high inflation and the resulting tight monetary policy by central banks to combat it.

    Hence the magnitude of the recession would be the persistence of inflation and the willingness of policy makers to ease policy when inflation starts to cool. For Malaysia, growth will slow in-line with global growth but should still remain relatively resilient supported by domestic consumption despite the drag from exports.

    Analyst expect a lower growth rate but still above 4% for 2023 with stable employment.

    Photo by Pablo Heimplatz on Unsplash

    SI: What is Kenanga Investors’ market outlook for 2023? What are the things to look out for?

    LSY: We think 2023 could see a market rebound depending on how long inflation takes to cool and the corresponding policy response from central banks. Global markets should be able to embark on a sustainable rebound once central banks signal a pause or a turn in policy stance.

    For now, trends in the datapoints point to lower inflation by end of 2Q’ 2023 due to easing supply side constraints, tighter policy working with a lag and base effects.

    Markets have declined significantly in 2022, pricing in higher rates and also a slowdown in growth. Looking a past history, markets tend to bottom about 1-2 quarters before the worst period in growth and earnings and sometimes even ahead of the final rate hike.

    Image by benzoix on Freepik

    SI: As a retail investor, where should we invest our hard-earned money in 2023?  

    LSY: Overall, we expect a recovery in global markets for 2023 after the sell-down in 2022. Valuations have become cheaper across the board and investors are highly cashed-up.

    Earlier in the year, we think bonds could perform better as inflation peaks. Meanwhile equities should recover thereafter, once the growth concerns get priced in and the central banks move to a more supportive stance.

    When equities rebound, we should see strong performances across the board regardless of geography. Malaysia also stands to see better days, as uncertainties abate post-election and global macro concerns cools. 

    The Answer To Where To Invest In 2023

    Hope you now have the answer on where to invest for next year. As we approach the end of the year, take the time to unwind and spend quality time with your loved ones.

    Read: Where To Invest In 2023: Amidst The Recession And General Election

  • Takaful: More Than Just Islamic Insurance

    Takaful: More Than Just Islamic Insurance

    Malaysians are generally at a loss when it comes to being able to tell the difference between takaful and insurance. Some come to the conclusion that takaful is the Islamic version of insurance, while some perceive that takaful and insurance are just the same, hence the term Islamic insurance.

    What Is Insurance?

    Insurance is where a company undertakes the risk to provide a guarantee of compensation for specified loss, damage, illness, or death, in return for payment of a specified premium. There are two types of insurance namely, life insurance and general insurance. The coverage includes the insurance of life, personal, property, marine, fire, professional liability and guarantee.

    The purpose of insurance is to manage one’s risk. When the insurance is purchased, the participant buys protection against unexpected financial losses. In case an unexpected loss occurs, the insurance company will compensate the loss to the participant.

    Should the participant have no insurance coverage and an accident happens, they themselves shall be responsible for all related costs. In other words, the risk in insurance terms means the probability of something harmful or unexpected happening. This might involve the loss, theft, or damage of valuable property and belongings, or it may involve injury or harm.

    Read: Should I Give Up Paying Insurance Premiums In Difficult Times?

    What Is Takaful / Islamic Insurance?

    Image by tirachardz on Freepik

    Takaful is often referred to as ‘Islamic insurance’. It is strictly a business transaction to mitigate the financial risk of unforeseen events to the participants. Takaful is formed on the social solidarity and cooperation amongst a group of participants who mutually agree to jointly indemnify
    loss or damage from a fund they donate to collectively.

    In other words, takaful is a type of Islamic insurance where member participants contribute money into a pool system (tabarru’) to guarantee each other against loss or damage.

    There are two types of takaful, namely family takaful (mirror of life insurance) and general takaful (mirror of general insurance). A takaful contract which is called ta’awun must be based on principles of cooperation, protection and mutual responsibility. It must avoid acts of interest, gambling and uncertainty.

    The term Islamic insurance is popular, because it takes the insurance concept and turn it into shariah-compliant.

    Read: Takaful vs Conventional Insurance: What’s the Difference?

    The Shariah Aspect Of Islamic Insurance

    Islamic scholars differ in their opinion about conventional insurance. Some say insurance is permissible, some say only several types of insurance are prohibited but most of the Islamic scholars conclude that conventional insurance is unacceptable in Islam.

    The Shariah Advisory Council of Bank Negara Malaysia in its resolution states that the prohibition of conventional insurance is because it does not conform with Shariah law, particularly on the contractual agreement between the policyholder and insurance company.

    Conventional insurance uses a sale contract in their agreement but there is an element of gharar fahish (major uncertainty) in the contract since the essential element of the sale contract is not fulfilled. Furthermore, conventional insurance is also based on the concept and practice of charging interest.

    Islamic Fiqh Academy gave several reasons for the prohibition of conventional insurance:

    • The policyholder does not know about the time of the contract and the amount of what the policyholder gives or gets.
    • It is a contract based on probability.
    • It includes excess and delayed riba.
    • It can be considered a form of betting because of the existence of ignorance, uncertainty and probability.
    • The premium is taken for no consideration in exchange.
    • There is a compulsion that is not compelled by Shariah law such as the insurer does no specific work for the insured.

    Read: How to Protect Yourself at Different Stages in Life With Insurance

    The Importance Of Insurance And Takaful

    Both insurance and takaful are financial safety nets set to helping participants and their loved ones recover after something bad happens to them. Bad things may strike a participant at any time such as a fire, theft, lawsuit or car accident.

    When the participant joins in takaful or purchases insurance, they will receive a certificate or an insurance policy, which is a legal contract between them and the takaful operator or insurance company.

    Read: Insurance Affordability vs Need, 6 Factors You Should Consider

    The Differences Between Insurance And Takaful

    ‘Insurance’ and ‘takaful’ by name, are known as products. One is offered in the conventional financial system while the other is offered in the Islamic financial system. In Malaysia, insurance companies are under the jurisdiction of the Financial Services Act 2013 and takaful operators are
    under the jurisdiction of the Islamic Financial Services Act 2013.

    Payment to the insurance company are called ‘premiums’ and it is owned by the company. The payment to takaful is known as a ‘contribution’ and it is owned by the fund. The takaful operator just ‘manages’ the fund. The policyholder ‘buys’ insurance, and the participant ‘joins’ takaful.

    Takaful and conventional insurance companies share a common objective in providing protection to the participant, their loved ones and their valuable belongings. For Muslims, takaful is not the alternative to insurance.

    It is because takaful is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members among the participants. It is a pact among a group of persons who agree to jointly indemnify the loss or damage that may be inflicted upon any of them, out of the fund they donate collectively.

    Business-wise, the main difference between conventional insurance and takaful is that the former is a risk-transfer model whereas the latter is a risk-sharing model. Mutual risk sharing is a transaction where instead of passing the risk on to an operator like conventional insurance, the risk in
    takaful is shared by every participant.

    The main concept of insurance is compensation of loss. Any insurance policyholder will be compensated once they lose something.

    In takaful, the concept is mutually helping each other (ta’awun). Members will get together to help other members should they incur any losses.

    Hope you now have a better understanding of takaful and insurance, and why the term Islamic insurance is often used.

    Read: Should I Nominate My Wife As Sole Beneficiary Of My Life Insurance Policy?

    About the Author

    Dr Haji Razli is a Senior Lecturer with Azman Hashim International Business School (AHIBS) at University of Technology Malaysia (UTM) and an Adjunct Fellow with IIUM Institute of Islamic Banking & Finance (IIiBF) at International Islamic University Malaysia. He is also the Honorary Secretary of the Association of Senior in Islamic Finance (ARIF).