Saturday, February 05, 2011

Investing choices are aplenty these days. But, so are the risksv

IN the modern world of investing, super computers and super secretive algorithms are employed to determine investment choices. Hedge funds have employed such machines and maths, along with eminently qualified staff a lot of universities would yearn for, to get an edge in today's world.

For some, that might be just too much science for the art of buying low and selling high. Technical chartists would say history is a yardstick for the future; fundamental investors will say, just look at how companies are performing to see if there is any real and tangible opportunity to make a buck.

The reality is that investing in today's world is far more diverse than say, a generation ago when most investors saw stocks and properties as the two major asset classes for investing.

These days, the choices are aplenty. And so are the risks. The world has become “smaller” through better information and trading platforms.

Simply put, this means Malaysians are no longer confined to buying stocks on Bursa Malaysia and speculating on properties in the KLCC area but they can also dip their savings into stocks on the New York Stock Exchange or into real estate investments from Shanghai to New York.

The avenue for Malaysian investors to have a bigger exposure overseas has also come from the big trend of Malaysian investment banks acquiring brokers in South-East Asia, which have offices in the major financial centres of the world and from the lowering of restrictions that had prevented Malaysians from investing overseas.

But the solid gains seen in 2010 will make investing in 2011 more tricky. Rallying stock markets have lifted valuation of stocks to the upper level of the historical band for many markets and commodity prices too have risen dramatically across the board and now threaten the incomes of people and stability of some countries.

Volatility has become a commonplace in investing and risks, from the political turmoil in the Middle East and North Africa to potential inflation curbing measures by economies in emerging markets, which threatens to throw a wrench in many sound investment plans.

As for local equities, analysts still appear to be upbeat. For one, TA Securities research head Kaladher Govindan, who is overweight on financials, oil and gas, construction, property, plantations, auto and the aviation sectors, says there is still a 10% to 15% upside in the stock market in 2011.

Still, he cautions: “There are risks, probably from inflation and the problems in Europe spreading to other countries.”

Metal is hot, water is bubbly...

For others, not many though, no one really believes in rune reading or letting a parrot decide how you should invest your money.

Investing through horoscope, though, has its following and one well-followed report on that method of investing has been the CLSA Feng Shui Index. Published since 1992, the report is an alternate way of looking at investing.

Don't scoff. CLSA's prediction for the Hang Seng Index (HSI) in 2010 eerily mirrors the actual performance of the index during the year.

“The 2010 Year of the Golden Tiger CLSA FSI (Feng Shui Index) predicted the performance of the HSI so precisely that even we were a little surprised,” it said in a statement accompanying its latest forecast for the year of the Rabbit.

And for 2011, the year of the metal rabbit, CLSA is expecting the HSI to see a slow February “with the Rabbit reluctant to emerge from its hole for fear the tiger still lingers.”

“March calls for patience as opposing forces test investors' metal. As the Rabbit finds his feet, wealth will come from the West in April and prove a great month for those with stamina.

“May begins with one of the year's four most auspicious dates (May 14), but we expect a tumble in June, providing a great buying opportunity for the savvy. Investors may want to rethink their summer-vacation plans; we see markets rising sharply over July and August. Money will flow,” it says.

CLSA says that with Fall comes a fall. The CLSA FSI predicts a sharp decline in September but not for long.

“October marks a sustained market rally with money flowing abundantly through to the end of November. However, investors should remain focused as markets decline during December. Come January 2012, the Bunny bounces back to close the year on a high,” it adds.

Sector-wise, CLSA says investors should pay attention to the five elements. “Metal is hot, water is bubbly, fire is on fire, wood would if it could and earth is soiled.”

It thinks financial stocks would enjoy a great year, along with gaming, gold, resources and transport.

“It will be a good year for oil and gas, technology, telecoms, Internet and utilities, but an unexciting time for the earth-related property sector.”

CLSA thinks that in terms of the Zodiac, 2011 most favours those born in the years of the Cow, the Sheep, the Dog and the Pig, while Tigers and Roosters will experience a bumpy year.

“This year's most auspicious dates are May 14, Aug 4, Nov 15 and Jan 16, while the least auspicious are June 16, June 22, Sept 23 and Dec 15,” it adds.

Set priorities

Many, however, would not use Feng Shui as the definitive guide to investing their money in 2011 and for Whitman Independent Advisers Sdn Bhd managing director Yap Ming Hui, he says deciding where to put one's money in 2011 has to be balanced by the debt a person is carrying, in particular credit card debt.

He says, there are three broad groups of people out there first group being those with a large amount of credit card debt. Their priority, naturally, is to cut down that debt as much as possible before thinking of investing their cash on assets for capital return.

“There is no point investing as it will be very hard to get a return of 18% a year,” he says, referring to the high annual interest rates being charged by credit card companies on debt rolled over by card users.

His next piece of advice is for those who don't have credit card debt but have no spare or emergency cash at their disposal. He is echoing a mantra among personal finance gurus whereby individuals should at all times have savings that are equivalent to 6 months of expenses.

Those savings generally are used to tide a person through bad times and if a person has no high interest debt and has excess cash apart from his or her emergency fund, then it's best to look at how to make that money grow.

Given how fast household debt as a percentage of GDP has risen, now at about 75% of GDP, Yap feels that people should learn to keep debt within a manageable level.

As a rule of thumb, total monthly loans repayments should be no more than 30% of a person's gross monthly income and should debt rise to say 50% or 60% of gross income, they open themselves up to more risk, should the economy slide or interest rates climb up.

Even though the official inflation rate is still relatively benign in Malaysia, Yap feels keeping all savings in the bank over time would not be the best strategy.

“Cash will shrink if left in the bank as inflation is higher than the savings rate of 2% to 3%,” he says.

“Invest in something that can hedge against inflation.”

What that is depends on one's risk appetite. Meanwhile, the adage not to plough all of your money into a single basket should ring loud and clear. For the risk averse investor, Yap says blue-chip stocks that offer a good dividend yield would be a sound path. Currencies where interest rates are higher, such as the Australian dollar, might not be ideal because of the exchange rate risk unless a person has use for the foreign currency at a later date.

The real estate

If there was one class of investment that really dominated headlines in 2010, it has to be property.

Prices of homes in the country rocketed in 2010, up 30% to 40% in the hot areas of Malaysia, and gave huge returns to property speculators that took advantage of the super low interest rates and generous loans given out by financial institutions in the country.

But for many in the business, such a rise is not sustainable. Prices are still expected to appreciate this year but should be at a lower gradient and the bubble-like nature of the housing sector has some worried over the sustainability of this asset class as an investment.

Khong & Jaafar managing director Elvin Fernandez says that even if house prices rise rapidly in the immediate future and there is currently some strong undercurrents pushing prices upwards, whether on good fundamental reasons or not, it is not likely that rents will follow suit.

“We may just see the net yields falling instead,” he says.

Fernandez says that in the past, house prices in Malaysia have generally kept pace with income growth, both growing at about 5% per annum.

“There is reasonably good statistical evidence for this. Prices rose much more sharply prior to the Asian Financial Crisis, but came down in its aftermath. Is there something similar in the works?” he asks.

“I would think that we ought to be very concerned when prices rise not in broad tandem with increases in household income.”

As prices of houses rise, and the affordability and rental yields drop, renting rather than owning houses might become the new norm in Malaysia.

Analysts have also cautioned that with a great amount of supply of higher price homes and a higher inflationary environment where central banks in the region have shown a greater propensity to raise interest rates, the dynamics of the real estate market might not be as certain in 2011, as it was last year.


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