Exchange rate risks and retiring to Asia

[Guest]

Imagine the scenario.

You work hard, save hard & plan to retire early on (say) £2000 a month, which gets 97,000 baht.

Then the pound falls, knocking 30% off your income in 5 years and halving it over 10 years.

Well, this could happen as the Bank of England is engaged in QE and as far as I know, the Bank of Thailand is not.

For similar reasons, the US dollar could go down the toilet too.

 

So if you want to spend a large proportion of your retirement in Asia, how do you manage the currency risk?

 

Ignore it & hope for the best?

Invest a proportion of your portfolio in Asia?

Or are you so wealthy it 's not an issue?

 

Personally, I'm a strong believer in investing money in Asia, even if only a small proportion of that would be in Thailand.

[Guest thaiworthy]

Cambodia is next door and accepts US dollars. However, that is not an attractive option and a worst case scenario.

[pong]

it is not specific that BofE. Take EURO: some years ago you got 48/49, a moment even 50 THB for 1. Now its just gone below 40.

A monthly pension of 1000 eur was once 50.000 and now 39.950 THB. Yes-we also had a few sad stories about how cruel this was for pensioners living on a smaller scale and now not meeting the 8k THB threshold for retirement visa.

I have very little experience with all those promises of companies and waytoohigh paid City/Canarywharfboys with big bonuses to trust them-they always know ways to have it end in their own pockets. But stories about what Thai investors do with your money tend to be even more cruel.

[Bob]

For those in the UK and US who have money stashed in banks back in their home country, one way to partially hedge is to shift funds to savings accounts here in Thailand. That totally protects that money from currency fluctuations and, as a current bonus, you can get 2-3 times the interest here that you get back in your home country. As a matter of safety, probably not wise to put it all in one Thai bank. [Come to think of it, Thailand earlier last year was saying it was going to institute some kind of deposit protection similar to the FDIC in the US; however, I've read nothing about that in the last 6 months or so and I wonder if anybody knows if they actually did anything about that issue?]

 

In my earliest vacation days here, I once got 44.5 baht to the dollar. It ultimately fell to about 28 baht to the dollar (just a year or so ago) but is now hovering around 31 baht to the dollar. I personaly don't see any more large swings (at least with the baht appreciating) for the next 10+ years as I'm guessing the US and UK economies will steadily (albeit, slowly) recover whereas I don't see Thailand doing all that well over that same time period for a myriad of reasons. But, who knows, its like reading tea leaves I suppose.

 

Inflation everywhere is likely a more potent concern to those pensioners who are here on a tight budget but they'd be facing the same problem in their home country as well.

[Guest fountainhall]


 if you want to spend a large proportion of your retirement in Asia, how do you manage the currency risk?

 

Bob remembers the heyday of the US$/Baht rate at 44.5. On my first visit in 1979, it was around 21. Yet, for 10 years prior to the July 1997 Asian economic meltdown, the Baht had been pegged to the US$ at 25. Anyone who was here in February 1998 will remember rates of 54 and 55. At that time shopkeepers were still in shock over the massive currency swing and had not priced their in-store goods upwards. If I’d had the cash, I could have bought a Steinway Grand piano for half price! Equally, condos were effectively half price.

 

But then, I can also remember the early 1980s. Reagan’s strict economic policies raised interest rates massively. Everyone in Hong Kong was going to banks for US$ denominated CDs yielding about 15% per annum – tax free! It was a crazy time!

 

The point, though, is surely that there has been so much volatility in the last 15 years, it is utterly impossible to predict the future. So Bob and z909’s suggestion of moving assets to this part of the world makes a lot of sense. If retirement is still some years off, I wouldn’t keep a lot actually in Thailand. If I did, I’d not plonk most of it into savings accounts where interest rates barely maintain parity with inflation. I’d put a chunk into a mix of Thai mutual funds. There are some good managers out there – e.g. Aberdeen Asset Management* – which offer a range of funds with various degrees of risk. I'd also do what I did back in 2000 – invest a small amount each month (think that’s called ‘dollar cost averaging’) to reduce volatility.

 

At my stage in life, I’m perhaps taking too much of a gamble (which means I am just being true to form)! I am still putting some funds into China and the other BRICs, as well as lower volatility mutual funds. About half my China investments are in cash. It is almost certain that the RMB will continue its slow rise against western currencies at about 5% per year. So far, that beats inflation. But unfortunately direct purchase of Chinese currency is restricted. If you have a friend who is a permanent resident of Hong Kong, ask him to do it for you. On the other hand, it is slowly getting easier. Branches of the Bank of China in the US now permit US citizens to purchase RMB. Singapore also permits foreigners to open RMB Time Deposit accounts. As time goes on, more possibilities will open up.

 

That said, anyone considering putting money into Asia with a view to retirement has also to bear in mind two crucial issues. For those who do not know much about Asia in general, it’s perhaps hard to realise the economic impact of China on all Asian economies. It’s an old adage, but it’s here more true than ever: if China sneezes, the rest of Asia will catch a cold. It's less a case of believing that China will continue to grow at rates which make western nations green with envy – that is virtually a ‘given’ – and much more if you believe China will remain stable. For if China starts to suffer from serious internal unrest, that cold will be more like another full-blown Spanish ‘flu epidemic.

 

The second factor has to be the price of energy. Oil, even at its present level, sets the inflation bells ringing. With the Arab Spring having thrown up governance issues which will not be resolved for many years, with Syria imploding, with the possibility of Iran’s nuclear facilities being destroyed being pretty high in my estimation and, equally probably, the US government continuing to print money, oil at $200 per barrel surely is not that far in the future. In that scenario, living anywhere on a small fixed income is going to become increasingly difficult. And it’s one reason why I’d always advocate purchasing an apartment as opposed to leasing.

 

(* I know there was a scandal re Aberdeen Asset in the UK 10 years ago. The Asian offices were not involved and were completely exonerated in the subsequent inquiry)

[Guest thaiworthy]

As a matter of safety, probably not wise to put it all in one Thai bank. [Come to think of it, Thailand earlier last year was saying it was going to institute some kind of deposit protection similar to the FDIC in the US; however, I've read nothing about that in the last 6 months or so and I wonder if anybody knows if they actually did anything about that issue?]

 

Sound advice, Bob-- thank you. I'll probably put half cash in baht and the other leave as cash in dollars in a US bank, (we're talking pennies here) since at my age I can still defer some earned interest in an IRA. Taxes are also an important issue, since $10,000 or more in a Thai bank has to be declared to the US govt. Also, I'm told not to be too hopeful that any Thai-equivalent FDIC program to bail out failed Thai banks would be very promising. In such an event, who do you think they'll pay first-- Thais or farang?

[Guest]

Anyone thinking long term should consider more than just bank deposits, as over long periods of time they just underperform against stock market investments.

Taking the UK as an example, you get maybe 3% interest & inflation is 4~5%. So the money's not keeping up with inflation. In 10 years time, your monthly interest may be worth half what it is now.

Buy some carefully selected stocks & you can get a 5% dividend yield, which on average is highly likely to keep up with inflation over the next 20 years.

Also, it's quite straightforward to buy into some diversified Asian investment trusts, or purchase individual stocks in some Asian stockmarkets.

[Guest thaiworthy]

What long periods of time? I'm nearly 62. Z, I am very sorry to say that kind of strategy doesn't work for everyone. If it works for you, then fine. But speaking for myself, I got clobbered in the dot com crash and then again a bit in 2008. My long term is over and out. There are some annuities that pay over 3% and some In-Force annuities that pay out much more than that. I don't think inflation is quite that high, at least from where I'm standing. I also don't believe the recession is over by any means, it will probably get worse. My money is on the safe side of things and although this may seem straightforward to you, I would not recommend everyone to consider this advice.

[Guest]

There are some annuities that pay over 3% and I don't think inflation is quite that high, at least from where I'm standing.

People would typically live on the 3% annuity payment, rather than use it to preserve the value of their investments.

In the UK, the majority of annuities are non inflation indexed, so that does not keep up with inflation. So have 10 years of inflation at 4% and your pension has lost 1/3rd of its value.

Inflation indexed annuities seem like a better long term move, but even those usually have some upper limit on the annual inflationary increase (in the UK at least).

[Bob]

As Khun Thaiworthy intimates, "long term" after retirement ain't anywhere near what "long term" meant when one was 40 or even 50 years old. And, of course, any money somebody may need in the next 2-3-4 years sure as hell ought not to be in stocks.

 

I'm also a little (a little, not entirely) wary of the notion of using the past to predict the future especially when it comes to economics. In my view, we're never going to see the 80's and 90's again (at least not in our lifetimes) and I don't think anybody would have ever guessed that we would have such a prolonged downturn in the US. And we could be back in the worst part of it in a heartbeat with all sorts of things happening (e.g., an Iran attack and oil hitting $140.00 or $150.00a barrel - and then we're all up shit's creek!).

 

Heck, we all probably could have made a ton of money taking bets in Japan or elsewhere 10+ years ago that the Japanese economic doldrums wouldn't last more than a few years.

[Guest]

As Khun Thaiworthy intimates, "long term" after retirement ain't anywhere near what "long term" meant when one was 40 or even 50 years old. And, of course, any money somebody may need in the next 2-3-4 years sure as hell ought not to be in stocks.

I agree stocks are not the place for money that's going to be spent in the next 4 years.

However, we also get people taking early retirement at 55 and having an average residual life expectancy not far short of 25 years.

That's easily long enough for factors like inflation to seriously reduce the value of your capital.

In that case, I would rather take the risk with stocks.

[Moses]

Russian banks pay up to 12,5% interest in roubles, up to 8,5% in US$ and 7,5% in Euro. Deposits have 100% insurance from govt. (within K$ 25 per bank\per person).

 

Some banks also pay up to 10% to holders of bank card (card account).

[Guest fountainhall]

we all probably could have made a ton of money taking bets in Japan or elsewhere 10+ years ago that the Japanese economic doldrums wouldn't last more than a few years.

I assume you mean they would have lasted more than ten years. Because they have now lasted over 20!

 

The Nikkei reached its all-time high of 38,957 in December 1989. It now hovers around 10,000, but was as low as 7,054 in early 2009. The attached graph shows the almost continuous decline -

 

 

At the peak of Japan’s bubble, the grounds of the Imperial Palace in Tokyo were worth more than the entire state of Cailfornia! There’s an interesting article in the Harvard Magazine which compares aftereffects of the bubbles in Japan and the US.

 

At issue is whether the United States might face a fate similar to Japan’s: a long period of economic stagnation. Japan’s unemployment is more than double what it was in the boom years, and real wages have fallen steadily, hitting a 20-year low in 2009. Repeated, drawn-out attempts at monetary and fiscal stimulus, including increasingly questionable spending on roads and bridges in a country that already had a history of massive infrastructure investment, have eventually led to a potentially crippling debt load for the nation.

 

http://harvardmagazine.com/2010/07/an-aftermath-to-avoid

 

The author believes the US has several advantages, including a larger land mass, a society accepting of immigrants, a culture which is flexible – and a higher fertility rate. So the US will not endure similar decades of stagflation.

[Guest]

At the peak of Japan’s bubble, the grounds of the Imperial Palace in Tokyo were worth more than the entire state of Cailfornia!

The key word in there is bubble.

Returns on shares tend to be inversely correlated with the price you pay in the first place. Pay a ridiculous price in a bubble & a loss is likely to follow. That's how it was with Japan & also the "technology" stocks were the same in about 2000. Actually, even boring telecoms companies that bounced along on PE ratios of less than 20 suddenly became fashionable & started selling for astronomical PEs -Vodafone was on a PE of about 80, if I remember correctly.

When it's that obvious, it becomes simple to spot the anomaly.

When selecting individual stocks, I like to buy on low PE ratios.