Expect much lower EPF dividend, say analysts

Analysts are predicting a lower dividend to be distributed to EPF contributors this year. (Bernama pic)

PETALING JAYA: Mid-February is a time of reckoning for EPF’s 14 million members who will wait with bated breath for the dividend announcement. For most Malaysians, the EPF is the only source of retirement funding.

So, what can we can we expect from the EPF this time round?

Speculation is rife that the provident fund is likely to declare a lower return than the 6.9% announced last year.

Sunway University’s Yeah Kim Leng said he expects the EPF to announce lower dividends this year.

“Both the global and the local economy did not fare that well last year. I would reckon 5 to 6% dividend as decent given the tough environment EPF had to operate in last year,” the economist told FMT.

Yeah said, after accounting for lower inflation of around 1% last year, the dividend payment would be respectable.

Pong Teng Siew, head of research at Inter Pacific Securities Sdn Bhd said his estimate for the dividend payment for 2018 was below 5%.

“The reason for my low prediction is that the equity market performed poorly last year and the EPF will not have extraordinary gains from their UK pound sterling investments,” Pong told FMT.

The provident fund, with some RM800 billion, relies on the local stock market for about 60% of its gross income.

The other major contributor is its investments in government bonds and securities, where the risk and returns are low.

The Malaysian stock market was weak in 2018 but other markets fared even worse.

Emerging markets as a whole had a difficult 2018, as funds flowed out of the region. The combination of the US raising interest rates and the trade war between China and the US caused investors to pull their money out of emerging markets.

According to preliminary figures from the Institute of International Finance, Inc (IIF) on emerging markets, in 2017, foreign funds came in at US$195.5 billion (RM767 billion) while in 2018, the figure was lower at US$173 billion (RM706 billion).

The fund flows in 2018, however, were higher than the US$149 billion in 2016 and US$81 billion in 2015.

IIF’s analysis tracks major emerging markets, such as Brazil, Turkey, Argentina, Indonesia, India and China.

According to MIDF Research, the local equity and bond market saw net outflows of RM10.7 billion and RM28 billion, respectively last year. The outflows were generally in line with the lower amount of capital flows into emerging markets last year.

A broader measure of the performance of the regional markets is the MSCI Emerging Market Index, which declined by 18% in 2018.

As for Bursa Malaysia, the benchmark FBM KLCI closed 5.2% lower in 2018 at 1,690 points, while the broader FBM100 stock index was down 8.37% and the FBM70 was down 17.43%.

The change in government played a role in the weak performance of companies on Bursa Malaysia. However, it is not the only reason, as external factors contributed more to the poor investor sentiment on emerging markets as a whole.

The companies that were affected on Bursa Malaysia are generally those with government contracts. The new government put a stop to inflated contracts to control the federal government’s coffers and to break up monopolies.

The change in government saw the cost of the Mass Rapid Transit 2 (MRT2) coming down by more than RM1 billion, phase three of the light rail transit (LRT) project being reduced by almost half from its estimated cost of RM31 billion, the review of the East Coast Rail Link and the postponement of the RM60 billion high-speed rail project.

This excluded the controversial procurement contracts given by the previous government, such as for the provision of immigration systems and the upgrading of railway tracks.

The government’s decision to break up monopolies affected several government-linked companies. Most affected are those operating in the telecommunications industry such as Telekom Malaysia Bhd and Axiata Group Bhd, as the government wants to reduce the cost of providing broadband services.

Therefore, a lower return from EPF for 2018 should not come as a surprise.

The new Malaysia needs more measures before money starts flowing back into the economy and stock market. Pointing fingers at the new government for the possibly lower dividends might not be the right antidote.