Dear
all, many have emailed me with the concerns on the potential impact of
the iSinar programme expansion allowing 8 million members to withdraw
RM10,000 from the "sacred EPF Account 1" announced by Tengku Zafrul
recently over the week. Largely, I can segregate the gist of questions
to these 4 points :
1. Should EPF savers still leave their money in EPF or withdraw to the maximum allowable limit?
2. Will the dividend for EPF next year still be good?
3.
If the EPF is financially sound, why did the CEO of EPF said there is a
need to liquidate the assets to meet surge in withdrawal demands and
shortfall?
4. If EPF liquidate assets, would the KLCI Bursa stock market be impacted?
I
shall answer the questions point by point and try to avoid any comments
on politics but solely focus on the economics behind this issue.
On Question 1 :
I
think it comes down to individual financial circumstances to make this
decision. For the longest time, I have always held on the belief that
EPF money shouldn't be touched until the very last resort. It is the
savings for your old age so that you do not need to work in McDonald's
when you are 70 or 80 years old when your savings run dry and normal
employment opportunities are no longer available to you. Allowing
withdrawal now is also in expense of savers, who maintain good
discipline and fiscal responsibility over the years to enjoy the fruits
of their labour in the twilight years.
However,
the counter argument is the Covid-19 pandemic has brought many
households which may suffer from loss of jobs, pay cuts or business
closure to their knees. If one cannot survive today, there is no future
to talk about. This is especially true for the B40 & M40 segment.
Near my office, there used to be only 1 Nasi Lemak seller by the
roadside. Today, there are 3 Nasi Lemak and 1 Chee Cheong Fun sellers
within 5 mins walking distance. It is such observations that made me
understand the plight of others better.
My
view would be to only withdraw if you already have absolutely no where
else to turn to as the final resort. If you are intending to withdraw to
buy a new car, upgrade your house or spend on a new iPhone, this would
be grossly wrong. As for savers, EPF by law is required to give a min
2.5% return per annum to members and at this rate of return, it is still
higher than all Fixed Deposit rate given by commercial banks today due
to the 100 basis points OPR rate cut through the year by BNM. If look at
the chart above of EPF dividend performance for the past 15 years, the
worst performance was in 2008 during the Global Financial Crisis. Even
then EPF declared 4.5% dividend yield then.
Additionally,
I conducted an internal poll with my private group subscribers. 79%
would leave their EPF funds in Account 1, 15% would withdraw the maximum
allowable limit and 6% would leave half and withdraw half subject to
eligibility.
On Question 2 :
Prior
to iSinar initiative, I was still rather confident that the dividend to
be declared next year would be quite good, if not better than last
year's performance as the stock market did very well this year
especially when compared to regional peers. The stock market has rallied
from a low of 1208 during the "March Plunge" on 19th March to a high of
1607 as at last Friday. This is despite the strong headwinds of a
pandemic driven economic recession. Even domestic bond markets are
performing well with large inflow due to attractive yield compared
global bond market low yield. After the iLestari and now iSinar
initiative, in addition lower EPF contribution inflow as many members
has either loss their jobs, suffered pay cut or companies have closed
down, the net inflow vs outflow gap widens significantly and likely it
will be in negative territory for EPF this year. This would mean the
potential dividend return next year would probably be lower than last
year. In the event it matches last year's performance, the full impact
will be felt in the years down the road. This is in line with what CEO
of EPF, Tunku Alizakri Raja Muhammad Alias said "There
is no such thing as a free lunch" in reference to the need to sell off
assets to make funds available to depositors withdrawing from their EPF
Account 1 & 2.
On Question 3 :
I
believe many have a misconception when it comes to the CEO statement on
liquidation of assets. EPF like any other funds, have to be invested in
the equity, bond, real estate or money market instruments. Cash / dry
powder cannot be the the bulk of the holdings as EPF mandate is to
deliver returns to members. To do so, the cash on hand cannot go stale.
However, this does not imply that EPF is lacking in cash allocated for
yearly withdrawal. In fact,
it is because this year is an exception / anomaly as a result of the
pandemic driven economic recession and policies made by the Government
which caught EPF asset allocation practice off guard. Hence, it cannot
be business as usual as "something's gotta give".
EPF
will need to liquidate assets or some of their existing position in
bonds, equities or money market instruments to meet the urgent demand
and need for withdrawal of members especially since Account 1 is now
accessible.
A
simple example : Imagine you who invest in the stock market actively,
suddenly with very short notice, your wife or husband tells you that
there is emergency need for funds, hence you need to pull out money
from the equities market now. What will you do? Will you sell your
profitable positions which you believe can do better if you continue
holding or will you sell the loss making position which you believe can
rebound? Either way your investment plan is affected. This is especially
bad for long term value investors who makes exponential returns in
later stage of the investment horizon. EPF in essence is a long term
investor. This would mean EPF will be impacted one way or another from
the liquidation of assets / position.
On Question 4 :
This
is the one which most investors in the stock market are concerned
about, it is important to understand the vast investment holdings of EPF
extends beyond local stock market. EPF would have options to sell
foreign equities, bonds in global markets outside of Malaysia equities.
If they opt to sell local equities more than the others, it would
definitely cause a sell down in the KLCI Bursa. I believe EPF wouldn't
do that but only embark on selective profit taking in sectors that have
done well this year. Hypothetically, if I am the decision maker, selling
foreign stocks which has ran up to record high would be a quicker and
better option without causing systemic risk to the local financial
markets. Bonds market where yields are less attractive though would be
an issue in terms of the price of sale.
In
addition, if members of EPF withdraws funds from Account 1 and put it
back into the equities market, spurring another retail rally, there may
be some net-off effects. Hence I am of the view the risk of large self
off in local markets is not high at this moment although there will be
some selling pressure unless foreign funds make a comeback with a bang.
We must remember it is local funds that has supported the KLCI Bursa
stock market with retail investors filling the void as foreign funds
sold stocks in Bursa to the tune of RM 23 billion to date in 2020.
Conclusion :
The
intent of this article is to alleviate some concern of readers and
assist one in better understanding the situation with EPF moving forward
in the near term. My humble view, if at all, the government should not
be asking people to dip into their own future savings to save themselves
but should use government internal funds to support these community.
Funds allocated for select new infrastructure projects, repairs or
upgrading of building work can be postponed as it is not of the utmost
priority now compared to the livelihood. The increased allocation for
controversial issues such as PMO, JASA departments can also be reduced
to compensate for the shortfall. My fear is this allowance for
withdrawal will set a precedent for the future and open the floodgates.
After all, EPF is one of the last few bastion of our country's esteemed
institutions that have yet to be exploited at the expense of the Rakyat.
_______________________________________________________________
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Food for thought:
https://klse.i3investor.com/blogs/tradeview/2020-11-28-story-h1537297962-_Tradeview_2020_EPF_iSinar_Withdrawal_Programme_The_Stock_Market.jsp
