What The MAS’s Latest Announcements Mean for Investors

Credit: Ethan Lofton

In what was a surprise for many economists, Singapore’s central bank, the Monetary Authority of Singapore, had decided to ease its monetary policy by cutting the slope of its Singapore dollar nominal effective exchange rate (S$NEER) policy band.

In other words, the Singapore dollar will still continue its gradual appreciation against a basket of foreign currencies, but the pace of the appreciation will slow down somewhat.

Along with the adjustment to the S$NEER policy band, the MAS also cut its inflation forecasts for Singapore for the current year. Instead of a previous forecasted range of 2% to 3%, inflation’s now estimated to come in around -0.5% to 0.5%. Given the negative figure in the inflation rate, it appears that deflation – or the phenomena of falling prices – may happen to Singapore.

Although inflation can be a painful event for consumers (it’s not nice to have to spend more to purchase the same amount of coffee, for instance), deflation can be just as dire, if not worse. Here’s how The Economist once described the dangers of deflation:

“The belief that money made tomorrow will be worth less than money today stymies investment; the belief that goods bought tomorrow will be cheaper than goods bought today chokes consumption. Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand.

Wages, incomes and tax revenue all stall, undermining the ability of households, businesses and governments to pay their debts – debts which, in real terms, will grow more burdensome under deflation.”

That sounds scary.

But, what do all these mean to local investors though? Frankly, not much.

In inflationary environments, businesses with pricing power are great investments. The renowned billionaire investor Warren Buffett said as much when he quipped that:

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

In deflationary environments, it’s still the same thing; businesses with pricing power can resist cutting their prices, thereby maintaining or even growing their revenue.

As investors, we’re often out looking for great businesses that hold pricing power. From this point of view, it doesn’t matter what the inflation rate is like – we’d still be holding out for the same types of businesses.

As for the change in the S$NEER policy band, which can affect the exchange rate of the Singapore dollar with other foreign currencies (as an example, the Singapore dollar had “slid to its weakest level since 2010” earlier today after the MAS’s policy announcement, according to a Business Times article), there’s not much we can do about it. So rather than fretting about things outside of our control, we should look inward and control the things we can.

Besides, currencies will do what currencies do and these things often move in cycles. At times, well-chosen companies can also win the struggle against the shackles of unfavourable currency movements.

We can take the conglomerate Jardine Cycle & Carriage Limited (SGX: C07) as an example. The company had made Indonesia-based automotive distributor and conglomerate Astra a subsidiary back in 2005. Since then, Astra has been responsible for the bulk (often more than 90%) of Jardine Cycle & Carriage’s revenue and profits.

Astra conducts its business in the Indonesian rupiah, but Jardine Cycle & Carriage reports its financials in the U.S. dollar. As you can see in the chart below, the rupiah has not had an easy time against the U.S. dollar. One U.S. dollar could fetch around IDR9,000 near the start of 2005; under today’s conditions, the same dollar can be exchanged for nearly IDR12,5000.

Indonesian ruppiah and US dollar exchange rate history


But in the chart below, look at the evolution of Jardine Cycle & Carriage’s profits in U.S. dollar terms since 2005. That near tripling of profit over the years has been a strong driver of the company’s share price increase from S$10.60 at the start of 2005 to S$42.38 today (that’s a 400% jump!).

Jardine Cycle & Carriage's profit

Source: S&P Capital IQ (data for 2014 is for the 12 months ended 30 September 2014)

The legendary investor Peter Lynch once said that in investing, “there’s always something to worry about.” That doesn’t mean though that we shouldn’t invest. Whatever the MAS’s policies may be in the future, sticking to the simple act of finding great businesses with the ability to grow over the long-term may be the best thing we as individual investors can do.

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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 companies mentioned.