August 08, 2022

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EPF iSinar Withdrawal Programme & The Stock Market


Dear all, many have emailed me with the concerns on the potential impact of the iSinar programme expansion allowing 8 million members to withdraw RM10,000 from the "sacred EPF Account 1" announced by Tengku Zafrul recently over the week. Largely, I can segregate the gist of questions to these 4 points :
1. Should EPF savers still leave their money in EPF or withdraw to the maximum allowable limit?
2. Will the dividend for EPF next year still be good?
3. If the EPF is financially sound, why did the CEO of EPF said there is a need to liquidate the assets to meet surge in withdrawal demands and shortfall? 
4. If EPF liquidate assets, would the KLCI Bursa stock market be impacted?
I shall answer the questions point by point and try to avoid any comments on politics but solely focus on the economics behind this issue. 
On Question 1 :
I think it comes down to individual financial circumstances to make this decision. For the longest time, I have always held on the belief that EPF money shouldn’t be touched until the very last resort. It is the savings for your old age so that you do not need to work in McDonald’s when you are 70 or 80 years old when your savings run dry and normal employment opportunities are no longer available to you. Allowing withdrawal now is also in expense of savers, who maintain good discipline and fiscal responsibility over the years to enjoy the fruits of their labour in the twilight years. 
However, the counter argument is the Covid-19 pandemic has brought many households which may suffer from loss of jobs, pay cuts or business closure to their knees. If one cannot survive today, there is no future to talk about. This is especially true for the B40 & M40 segment. Near my office, there used to be only 1 Nasi Lemak seller by the roadside. Today, there are 3 Nasi Lemak and 1 Chee Cheong Fun sellers within 5 mins walking distance. It is such observations that made me understand the plight of others better. 
My view would be to only withdraw if you already have absolutely no where else to turn to as the final resort. If you are intending to withdraw to buy a new car, upgrade your house or spend on a new iPhone, this would be grossly wrong. As for savers, EPF by law is required to give a min 2.5% return per annum to members and at this rate of return, it is still higher than all Fixed Deposit rate given by commercial banks today due to the 100 basis points OPR rate cut through the year by BNM. If look at the chart above of EPF dividend performance for the past 15 years, the worst performance was in 2008 during the Global Financial Crisis. Even then EPF declared 4.5% dividend yield then.
Additionally, I conducted an internal poll with my private group subscribers. 79% would leave their EPF funds in Account 1, 15% would withdraw the maximum allowable limit and 6% would leave half and withdraw half subject to eligibility. 
On Question 2 :
Prior to iSinar initiative, I was still rather confident that the dividend to be declared next year would be quite good, if not better than last year's performance as the stock market did very well this year especially when compared to regional peers. The stock market has rallied from a low of 1208 during the “March Plunge” on 19th March to a high of 1607 as at last Friday. This is despite the strong headwinds of a pandemic driven economic recession. Even domestic bond markets are performing well with large inflow due to attractive yield compared global bond market low yield. After the iLestari and now iSinar initiative, in addition lower EPF contribution inflow as many members has either loss their jobs, suffered pay cut or companies have closed down, the net inflow vs outflow gap widens significantly and likely it will be in negative territory for EPF this year. This would mean the potential dividend return next year would probably be lower than last year. In the event it matches last year's performance, the full impact will be felt in the years down the road. This is in line with what CEO of EPF, Tunku Alizakri Raja Muhammad Alias said "There is no such thing as a free lunch" in reference to the need to sell off assets to make funds available to depositors withdrawing from their EPF Account 1 & 2.
On Question 3 :
I believe many have a misconception when it comes to the CEO statement on liquidation of assets. EPF like any other funds, have to be invested in the equity, bond, real estate or money market instruments. Cash / dry powder cannot be the the bulk of the holdings as EPF mandate is to deliver returns to members. To do so, the cash on hand cannot go stale. However, this does not imply that EPF is lacking in cash allocated for yearly withdrawal. In fact, it is because this year is an exception / anomaly as a result of the pandemic driven economic recession and policies made by the Government which caught EPF asset allocation practice off guard. Hence, it cannot be business as usual as “something’s gotta give”. 
EPF will need to liquidate assets or some of their existing position in bonds, equities or money market instruments to meet the urgent demand and need for withdrawal of members especially since Account 1 is now accessible. 
A simple example : Imagine you who invest in the stock market actively, suddenly with very short notice, your wife or husband tells you that there is  emergency need for funds, hence you need to pull out money from the equities market now. What will you do? Will you sell your profitable positions which you believe can do better if you continue holding or will you sell the loss making position which you believe can rebound? Either way your investment plan is affected. This is especially bad for long term value investors who makes exponential returns in later stage of the investment horizon. EPF in essence is a long term investor. This would mean EPF will be impacted one way or another from the liquidation of assets / position. 
On Question 4 :
This is the one which most investors in the stock market are concerned about, it is important to understand the vast investment holdings of EPF extends beyond local stock market. EPF would have options to sell foreign equities, bonds in global markets outside of Malaysia equities. If they opt to sell local equities more than the others, it would definitely cause a sell down in the KLCI Bursa. I believe EPF wouldn’t do that but only embark on selective profit taking in sectors that have done well this year. Hypothetically, if I am the decision maker, selling foreign stocks which has ran up to record high would be a quicker and better option without causing systemic risk to the local financial markets. Bonds market where yields are less attractive though would be an issue in terms of the price of sale. 
In addition, if members of EPF withdraws funds from Account 1 and put it back into the equities market, spurring another retail rally, there may be some net-off effects. Hence I am of the view the risk of large self off in local markets is not high at this moment although there will be some selling pressure unless foreign funds make a comeback with a bang. We must remember it is local funds that has supported the KLCI Bursa stock market with retail investors filling the void as foreign funds sold stocks in Bursa to the tune of RM 23 billion to date in 2020. 
Conclusion :
The intent of this article is to alleviate some concern of readers and assist one in better understanding the situation with EPF moving forward in the near term. My humble view, if at all, the government should not be asking people to dip into their own future savings to save themselves but should use government internal funds to support these community. Funds allocated for select new infrastructure projects, repairs or upgrading of building work can be postponed as it is not of the utmost priority now compared to the livelihood. The increased allocation for controversial issues such as PMO, JASA departments can also be reduced to compensate for the shortfall. My fear is this allowance for withdrawal will set a precedent for the future and open the floodgates. After all, EPF is one of the last few bastion of our country’s esteemed institutions that have yet to be exploited at the expense of the Rakyat.

Food for thought: 



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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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