IN HIS speech at the opening of the Kwasa Damansara EPF Tower on May 8, Prime Minister Anwar Ibrahim called on the country’s national retirement funds manager to increase its domestic investments to 70% from the current 64%.

The call by the prime minister to increase domestic investments, which entails simultaneously decreasing overseas investments, has been met with scepticism by experts. 

The worry is that the fund would be “deployed” to prop up our stock market which has been lagging, for well over three years now since its previous 12-year bull run.

Under such a scenario, EPF can be used to counter-balance the short-run overreaction phenomenon “typical” in our stock market vis-à-vis retail investors who are already “ageing” relative to the replacement pool rate, as an example.

But apart from such a highly unlikely situation, we already have ValueCap reactivated in 2015 to inject funds into underperforming stocks.

There’s no reason at all for the government (any for that matter) to “instruct” EPF in this direction.

However, it’s still plausible that the government expects EPF to increase its equity investments in our stock market. By extension, there’s the worry of a lower rate of returns domestically as compared with overseas investments.

Nonetheless, such worry is misplaced. The prime minister is very clear on the key strategic areas that EPF should focus on, namely food security, youth employment and start-ups (mainly non-listed) which go beyond the stock market.

He has made a highly commendable, albeit controversial call for the following reasons:

1. The figure quoted by the prime minister is 70% which by default means that overseas investments will still be at a significant 30% at the minimum. In other words, his call doesn’t portend the diminution of the strategic and critical importance of overseas investments. Given the looming “recessionary” trends in the West (US and Europe), not least as pressured by the consecutive/aggressive interest rate hikes, the call by the prime minister is very timely.

2. A low interest rate environment has allowed EPF to continue delivering, even despite the disruptions caused by the Covid-19 pandemic. Ironically, these “internal contradictions” (arising from lack of a proper fiscal union) would increase the supra-national entity’s own indebtedness.

3. The prime minister, therefore, has the foresight to envision that EPF’s priorities could do with some re-balancing towards increasing its domestic investments in food security youth employment, and start-ups, etc. This would help to cushion the impact of the global “recessionary” trends on our economy which is also expected to enter into a downturn as a consequence. 

With the resumption of the normalisation process by Bank Negara via OPR (Overnight Policy Rate) hikes, this will definitively impact on private spending (investment, consumption). In this, EPF would be well-poised to inject non-governmental spending on behalf of the government and help to counteract the decline in aggregate demand in the economy without necessarily burdening the national debt at the same time whilst ensuring the rakyat are not only the beneficiaries of the returns (dividends) but the investments (multiplier effects) as well.

4. This would help strengthen our economic fundamentals by enhancing and bolstering liquidity in the financial system given the deliberate monetary tightening policy by Bank Negara. EPF can complement our central bank by increasing its bond holdings from the secondary markets, including under ISCAP (Institutional Securities Custodian Programme) for short- to medium-term duration. 

This enhances liquidity in the financial system by allowing primary bond holders to release captive holdings (held-to-maturity/HTM) in return for a fee (functioning as investment return) whilst enabling secondary purchasers such as EPF to benefit from coupon rate arbitrage in terms of the differences between current and previous issuances. As such, EPF can mirror a similar role to ValueCap but in the bond market by keeping yields lower than they would be. 

By extension, repatriating funds from overseas as a necessary consequence of the divestments could help strengthen the ringgit’s fundamentals and place our currency on a trajectory towards appreciation below the RM4.30 mark.

5. Re-balancing portfolios in terms of the domestic-overseas divide would also compel EPF to further enhance and upgrade its overseas investment strategies. This entails coordinating and synchronising investment (capital account) with trade (current account) strategies as a policy vision and approach.

6. It can’t be strongly emphasised enough that the call could be seen and conceptualised as part of the structural transformation of the economy under Malaysia Madani which seeks to, among other things, promote a more populist economy. 

By creating the multiplier effect, including increasing employment, it’ll directly increase the number of contributors and, by extension, the total assets accumulated which in turn will indirectly contribute to higher yields and returns overall.

7. What shouldn’t be overlooked in making the investments (whether domestic or overseas) is the need to implement and execute the IOOI (Input, Output, Outcome, Impact) model. This means that in all investment decision-making and project management, we should go beyond calculus or projection of returns. 

The proposed investments must also yield long-term multiplier and sustainable benefits to the broader society, entailing multidimensional perspectives/paradigms and lateral thinking. 

Ultimately, the IOOI model would ensure that EPF’s investments are closely connected/aligned to the national strategies, ambitions, goals, targets and aspirations, including in food security, as envisioned by our prime minister.

It would provide a clearer and more dedicated focus for EPF in their investment decision-making processes and strategies.

In the final analysis, notwithstanding its controversial nature, the prime minister’s call has profound implications for EPF and the economy. – May 12, 2023.

Jason Loh reads The Malaysian Insight

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.