P2P Investment: Tool To Mitigate Losses

The prolonged United States-China trade war continues to weigh on investors’ sentiment, adding more risks to the global as well as local economic growth. With China and US being Malaysia’s largest and third-largest export markets respectively, any slowdown in the world’s two biggest economies may have spill-over effects on the country’s economy.

Further adding to the spill-over effect, central banks around the world are cutting their
interest rates, against the backdrop of escalating tensions between the two countries and its continuous economic impact worldwide. Malaysia’s central bank, Bank Negara Malaysia (BNM) had already announced a 25 basis points (bps) cut on overnight policy rate (OPR) to 3.0 percent earlier in May amid signs of tightening financial conditions that are directly affecting the country’s foreign direct investments.

Equally affected is Malaysian ringgit, as it was dragged to its lowest level in almost two
years, with global equity markets including Bursa Malaysia equally punished – resulted in the FTSE Bursa Malaysia KLCI to decrease 117 points or 7 percent to the lowest point of 1551 in 2019 from 1668 since the beginning of 2019.

And, just as newly announced in late October this year, the United States’ Federal Reserve decision to cut its interest rates for the third time this year by 25 basis points to a range of 1.5 percent to 1.75 percent signifies the continued sluggish US economy amid ongoing trade disputes and unfavourable global growth.

The prospect of a low global interest rate environment is expected to continue to place
downward pressure on traditional investment assets as lingering geopolitical risks, moderate global economic growth, mounting debts and lower commodity prices serve as challenges facing the world’s financial markets. These, along with yet-to-be-identified events will invariably continue, and investors resolve will be tested.

Diversification is key
A basic-but-powerful strategy to adopt in withering the lower interest rate environment would be diversification. Diversification beyond stocks and bonds is required due to increasing correlations between these asset classes. Increasingly interconnected markets mean that traditional asset classes and geographic diversification no longer provide the downside protection that investors expect. Diversification also helps investors mitigate volatility and take advantage of opportunities across an evolving set of asset class portfolios.

Alternative investments, such as peer-to-peer (P2P) investment for instance, have a lower correlation to traditional stocks and bonds, which can be a tool to mitigate market volatility and losses in the long run.

Back in 2016, the Securities Commission Malaysia (SC) became the first in Southeast Asia to introduce P2P financing along with a regulatory framework. Hence, an ‘alternative’ financial instrument emerged as a new way of investment for Malaysian investors.

Wong Kah Meng, Co-founder and Chief Executive Officer of Funding Societies Malaysia,
said, “P2P financing allows investors to support the growth of local SMEs by providing them an alternative source of capital to fund their business expansion. In return, investors can earn interest rates of up to 14 percent p.a. after fees but before defaults. By investing in P2P platforms, investors are able to diversify their portfolio into an asset class that have lower correlation to traditional financial markets, hence improving their portfolio’s risk-adjusted returns.

“Further, we expect P2P investing to become more appealing to investors given the current low interest rate environment. While traditional asset classes, such as fixed deposits and bonds are now offering lower interest rates, we expect the returns from P2P investing to remain relatively stable. In addition, given the current global macroeconomic environment, there is greater volatility and correlation amongst traditional investment options and hence, P2P investing could play a key role in the diversification strategy for investors,” Wong added.

As the largest P2P financing platform in Southeast Asia with more than RM2.7 billion
working capital disbursement regionally, Funding Societies has been able to maintain a low default rate of around two percent across the region and provides a user-friendly investment process supported by best-in-class customer experience. Investors can easily invest in local SMEs and earn attractive risk-adjusted returns compared with other forms of traditional investment options as the platform offers interest returns of up to 14 percent p.a. after fees with minimum investment amount from as low as RM100.

Other attractive criteria of Funding Societies’ investment portfolio include flexible
opportunities with short tenures ranging from one to 18 months, along with handy investment fact sheet for investors’ reference for transparency purposes in better guiding them to make sound investment decisions. Funding Societies also has an appointed independent licensed trustee to secure investors’ funds.

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