Here’s Why Investors Should Not Worry about the MAS’s Recent Announcement

Yesterday, the Monetary Authority of Singapore (MAS) announced that it will slow down the pace of appreciation of the Singapore dollar.

With the sharp decline in the price of oil taking hold in recent months,  the central bank is worried about deflation setting in should the Singapore currency continue to appreciate against other foreign currencies.

The central bank also lowered our nation’s inflation outlook for 2015, marking it down by 1 percentage point from its previous forecast to a new range of “-0.5% to 0.5%.”

Such serious-sounding and complicated policy changes by the MAS are often closely watched by economists and do have the power to sway the financial markets from time to time. But, that doesn’t mean that individual investors should make any major adjustments – maybe not even minor ones – to the way they invest.

Should I sell? Should I buy?

You might have imagined that all of us at The Motley Fool Singapore were in a state of panic yesterday, busily adjusting our spreadsheets to take into account new currency swings between the Singapore dollar and other foreign currencies, or to start frantically opening up our brokerage accounts to key in buy/sell orders.

If you really had that mental image, then I’m sad to say that you’d be disappointed. Truth is, my colleagues and I went about our day as usual, investigating individual companies, reading up on interesting investing stories, and writing educational and useful (we hope!) content – like what you’re reading now.

So really, for investors wanting to buy great businesses for the long-term (like us here at the Fool), it was simply just another day despite the MAS’ surprise tinkering with its Singapore dollar exchange rate policy.

What is history telling us?

One of the biggest stories that appeared yesterday after the MAS’s announcements was the sinking of the currency. For instance, local news outlet Today reported that “Singapore’s dollar sank as much as 1.3 per cent by 7:09am [28 January 2014] in London as policy makers reduced the managed currency’s pace of appreciation.”

A 1.3% intra-day decline, for a currency, can be a big movement. And it may set off the jitters for investors in Singapore’s stock market. But here’s some historical perspective.

Over the past 10 years, the Singapore dollar has appreciated by nearly a fifth against the U.S. dollar if we measure from end-to-end. But, that appreciation had taken place with frequent bouts of wild swings in the interim (see the chart below).

Singapore dollar and US dollar exchange rate history

Source: S&P Capital IQ

And what have our local stock market done? Over the same timeframe, individual companies like Raffles Medical Group Ltd (SGX: R01) and Silverlake Axis Ltd (SGX: 5CP) have done way better with total returns of 1,003% and 416%, respectively, with dividends reinvested. If we plot the returns of the two shares on the same chart as the exchange rate between the Singapore dollar and the U.S. dollar, the latter is basically an inconsequential straight line.

Chart for Raffles Medical, Silverlake Axis, and Singapore Dollar

Source: S&P Capital IQ (Raffles Medical in green; Silverlake Axis in purple; exchange rate between SGD and USD in blue)

Foolish Summary

The returns of Raffles Medical Group and Silverlake Axis have not come in a vacuum. They’ve appeared because the businesses of the two companies have grown.

Raffles Medical and Silverlake Axis EPS growth

Source: S&P Capital IQ

This goes to show that as long term investors, we should really be worrying about finding great and strong companies that will help us compound our wealth for years to come. It was the case before the MAS tweaked its exchange-rate policy for the Singapore dollar; it remains the same after the tweak. In the face of multi-bagger returns, currency fluctuations often melt into insignificance.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 Stanley Lim doesn't own shares in companies mentioned.