1 Glaring Blind Spot Singaporean Investors Have About Investing Risks

From my daily observations, one common theme regarding Singaporean investors’ aversion to investing in foreign stock markets is currency risk. They’re unsure of what foreign currencies might do against the Singapore dollar, and hence, would prefer to invest solely in Singapore-listed shares to mitigate such risks.

That makes sense on the surface. For instance, just 10 years ago at the start of 2004, the USD/SGD exchange rate was close to 1.7; today, it’s in the region of 1.3, meaning to say the US dollar has depreciated against the Singapore dollar by almost a quarter. This has given American stocks a steeper slope to overcome when it comes to earning good returns in Singapore-dollar-terms for local investors.

But, a fixation on obvious currency risks may just lead to Singaporean investors overlooking the fact that shares denominated in Singapore dollars can still be subjected to great degrees of currency risks.

Food & beverage manufacturer Food Empire Holdings Limited (SGX: F03) provides a great example of such latent currency risks.

The company counts Russia as its main geographical market and with the Russian ruble falling by almost half against the US dollar since the start of the year (mainly due to economic sanctions against Russia and a falling oil price), Food Empire’s share price has followed suit with a 41% decline to S$0.325 over the same time period. This has occurred even as the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), has gained 4.3%.

The situation wouldn’t be that bad if it were just Food Empire’s share price that got affected (a falling share price with intact business fundamentals can make for a great investing opportunity). But as it is, Food Empire’s earnings have been hammered – badly. For the first nine months of 2014, Food Empire’s net income has slid from a profit of US$11.9 million a year ago to a loss of US$1.6 million.

If the Russian ruble remains depressed for prolonged periods of time (and good luck trying to forecast currency swings!), Food Empire would have a major uphill battle on its hands if it wants to continue growing its business.

A Fool’s take

Howard Marks, the co-founder of Oaktree Capital and a very astute market commentator, once wrote that (emphasis mine) “People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it; thus, they accept risk unknowingly and in so doing contribute to its creation.”

It can thus be very dangerous for Singaporean investors if they invest without being cognizant of latent currency risks embedded even in Singapore-listed shares that are traded on the Singapore dollar.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.