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Investment for Expats in Malta

Submitted: November 2013

In Malta, expats should be concerned with beating inflation and taxes to preserve the value of their savings. Malta is one of the few jurisdictions where locking up your savings is still highly rewarding.

Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with inflation in Malta. If you plan to return to your home country, you might prefer beating the inflation rate of that country.

Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside the Euro-zone but you invest in any Euro assets, you are effectively making a currency bet.

Inflation in Malta

As of today, Malta’s inflation rate (0.6%) is broadly in line with the Euro-zone aggregate (0.7%).

Given that the ECB’s inflation target is below 2% per year, Malta should aim a similar inflation rate over the long-term. However, Maltese inflation has been fairly volatile over the past 10 years (between -1% and 6%).

For more information on monetary policy, see Foreign Exchange for Expats in Malta.

Savings accounts

Malta-based deposits are guaranteed by the Depositor Compensation Scheme up to €100,000.

When you bank in Malta, you should seriously consider term deposits. Easy-access savings accounts are likely to offer a poor yield (between 0 and 1.5%) whereas term savings accounts can yield up to 4.5%. You should shop around before signing up for a savings account. Do also check how reliable your bank is.

Government debt

The Central Bank of Malta issues Government bonds. The yields vary strongly. You can get no more than 0.7% on a 1-year-bond, 3.2% on a 10-year-bond, and 4.6% on a 20-year-bond.

You are therefore likely to make real gains if you invest in long-term Government bonds ... unless Malta defaults on its debt. Remember that you can make a capital gain if you resell your bond if the market demands a lower interest rate in the future. This is because the market would be willing to pay more to get the yield you can get today.

As Malta’s yield curve tends to be a bit sharp, there is a strong likelihood of making a capital gain on a long-term bond as you get closer to maturity. There again, a sharp yield curve may mean that the market is already pricing that it is sceptical about Malta’s long-term sustainability.

Example

In 2013, Archie invests in a Maltese Government bond with a maturity of 10 years (2.6%). In 2018, Archie decides to sell that bond.

In 2018, the market will demand the yield on a 5-year bond (2.05% in 2013) and price it accordingly. Unless interest rates generally move higher, Archie would make a capital gain.

Share dealing

Malta has a small Stock Exchange, whereon only a limited number of companies are listed. Be careful not to push the market around. Due to the low level of liquidity, even a €10,000 transaction could be enough to move share prices.

Typically, a Maltese share (other than BoV or HSBC Malta) is traded no more than once or twice per day. If you take shares only, the daily volume traded is around €100,000.

Generally, expats may consider share dealing in another Euro-zone country. The advantage is obviously about getting a wider range of investments available. Thanks to the Euro, there is no foreign currency exposure. It is best to check how such investments would then be taxed. For more information on investment taxation, see TAXATION – Investment Taxation for Expats in Malta.

Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, Maltese interest rates are moderately low whereas Euro-zone interest rates are going to record lows (see the yield on German Bunds). The ECB may keep interest rates anchored for a while, but they will have to rise sometime in the future. See Foreign Exchange for Expats in Malta.

You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.

On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.

Financial returns

From a financial point of view, the real return on investment consists of:

  • net dividend yields
  • net capital gains

When a company reinvests its business profits, the net dividend yield is lower but this may be offset by higher potential for capital gains over the long run.

FX risks

As an expatriate, you don’t necessarily want to be a speculator. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet. A lot of money can be made on currency bets, but a lot of money can be lost as well.

Example

Charlie is a US citizen who has been posted to Malta for one year. He will return to Seattle later on.

His net salary is €50,000 per year, but he intends to spend only €20,000 per year. He thinks it would be appropriate to save an additional €15,000 for a rainy day whilst he is in Malta.

Charlie is effectively making a currency bet if he fails to convert 50,000 – 20,000 – 15,000 = €15,000 into US dollars.

Alternatively, FX exposure can be reduced (or increased) through the purchase of relevant derivative products (e.g. FX options, swaps or forward contracts). Derivatives can be highly effective but they are quite complex, especially for individuals with little financial education. It is advisable to seek professional advice before taking action.

Overseas investments: practical tips

If you wish to invest in overseas assets, there are a few points you need to check:

  • Financial transactions taxes
  • Inheritance tax considerations
  • Asset liquidity
  • Broker’s fees (pricing structures may vary greatly from one jurisdiction to another)
  • Foreign withholding or income taxes
  • Yields available on foreign investments
  • Foreign currency exposure.

Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle. Alternatively, many expats may choose to invest outside Malta to keep a wide range of investments available.

For more information on offshore investments, see our section on alternative investments.

 

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