REAL estate investment is popular because it is often thought of as an effective hedge against inflation. The perception is that property values are almost guaranteed to appreciate as inflation rises.
When it comes to real estate investment, it is always about location, location and location. And of course, timing and quality or type of asset also play an important role in determining the rate of return on this investment.
In Malaysia, investors have several options. One is through direct investment in physical assets, such as land or residential and commercial units. But this option will most likely require investors to come up with a huge capital expenditure.
Nevertheless, to CTLA Financial Planners Sdn Bhd managing director Mike Lee, it is just a leverage game.
“You pay only 10%, and borrow the rest,” he explains, adding that as long as interest rates remain low, the incentive to borrow and buy will be there.
Return on direct investment in physical assets can be in the form of a steady stream of net rental income, or substantial capital gains upon disposal.
But as property prices have risen tremendously over the last one year, especially in certain parts of the Klang Valley, licensed financial adviser Jeremy Tan of Standard Financial Planner Sdn Bhd (FP) says, “a detailed study is recommended before investing in one.”
Another more affordable option is real estate investment trust (REIT).
“The initial capital outlay of investing in REITs is low, with minimum required investment of around RM1,000, compared with buying a piece of property, which can cost up to 10% to 30% of the value of the asset.
“And there's no need of mortgage financing,” explains Tan. REITs are traded like an equity in the local stock market, and allow investors to participate in investment in high-profile, high-value properties for better returns.
Investors will gain through attractive dividend yields, currently averaging at around 7.5%, which seem more attractive compared with fixed deposits. By CECILIA KOK
IN an environment of low interest rates and rising inflation, is it still wise to keep money in fixed deposits (FDs)? Certainly, according to financial experts.
“As part of portfolio diversification, placement of funds in FDs is still mandatory. This asset class should comprise of contingency funds that can be easily accessible in financial emergencies,” SFP's Tan explains.
“As a rule of thumb, one should keep aside at least three to six months of one's income in this asset class. Apart from that, it is not advisable to place any excess funds in FDs, as the yield is lower than the inflation rate; investors should rather look at other vehicles that pay better returns than the FD and inflation rates,” Tan adds.
In Malaysia, risk-averse devotees of FDs have always regarded the instrument as “safe,” in the sense that they will not lose their capital (in nominal terms), while at the same time enjoy some interest payments from the bank. But this is a false perception, as CTLA's Lee highlights.
“Inflation can erode the value of money. And the impact can be quite bad, especially for those who keep most of their money in FDs for a prolonged period, considering the fact that they only earn an interest income of less than 3% a year, while losing, say, 10% in purchasing power at the end of each year. Compounded forward, the value of FDs will be depleted in ringgit terms,” Lee explains.
“The prudent approach is to retain in FD what one needs for emergency and the rest should be invested wisely,” Lee explains. By CECILIA KOK
UNIT TRUST/ MUTUAL FUNDS
FINANCIAL planners are quick to point out that there is no one-strategy that fits all investors when it comes to investing in mutual funds. A mutual fund is designed to invest a pool of investors' monies in a basket of securities be it stocks, bonds or money market instruments, depending on the fund's strategy.
An investor should be mindful of his/her risk appetite and desired returns when considering the types of funds equities, fixed income or balanced to invest in, says Great Vision Advisory Group executive director Andy Tang.
Tang's recommendation for this year would be balanced funds (which comprise equities and bonds) to provide both income and modest appreciation, with an expected return of between 6% to 8%.
Meanwhile, the iFast Capital Sdn Bhd research team expects equities to outperform bonds this year and maintains its overweight recommendation for equities. iFast, which is a registered institutional unit trust adviser and distributes funds through its website Fundsupermart.com.my, says that emerging market equities funds are expected to perform well as fund inflows into these markets continue, their economic growth remains robust and valuations in these market remain attractive.
It adds that funds with exposure to North Asian markets may do better than South-East Asian markets as the latter markets saw strong performances last year and North Asian markets such as South Korea, China and Taiwan are likely to play catch up this year.
For bond fund investors, iFast suggest funds that look at the high yield and emerging market debt space which is likely to fare better than safer low-yielding global bonds. It added that investors should remain cautious on long-duration developed sovereign debt as interest rates see further increases. By JEEVA ARULAMPALAM
EQUITIES THE two driving forces behind investing in equities would be to see capital appreciation and earn income through dividend. The old adage commonly passed on to novice investors is to invest in growth stocks for capital appreciation and blue-chip companies for stable dividend income.
However, Great Vision's Tang says that since equity investments are a riskier option, investors need a strong stomach to withstand market volatility.
“An investor's risk appetite needs to be based on his/her age.
The older you are, the less risks you will want to take as your investment time frame may be shorter and you do not want to lose money.
The recommended stocks for this year would be the ones that will benefit from projects earmarked under the Economic Transformation Programme (ETP) such as infrastructure and oil and gas (O&G) stocks,” says Tang.
Some of the key infrastructure projects include the mass rapid transit, highway developments and low-cost carrier terminal projects while O&G stocks are favoured as the local service providers benefit from various incentives given and contracts to be awarded under the ETP.
CIMB Research analyst Norziana Mohd Inon maintains an overweight call on the O&G sector, as it is a major beneficiary of the ETP.
“The share prices of O&G stocks in our coverage have gained 13.7% on average year-to-date compared with 0.1% for the FBM KLCI. Our portfolio has been lifted primarily by our top pick SapuraCrest (Petroleum Bhd),” she said in a report issued on Wednesday.
Aside from O&G stocks, Deutsche Bank's Asean/Malaysia equity research head Teoh Su-Yin said in a media briefing last week that plantation stocks, companies which had diversified into the region, and property stocks were the house picks this year.
The bank's overall outlook for the local market is positive, with a target of 1,790 for the benchmark FBM KLCI by year-end. The index ended higher this week by 9.93 points to 1531.82 from a week ago. By JEEVA ARULAMPALAM
Direct investment in the bond market in Malaysia is currently not as accessible to retail investors as it is to institutional investors and high net worth individuals.
Most retail investors' exposure to the bond market is through their investments in unit trusts, where the minimum initial investment required for bond funds is usually RM1,000, compared with the minimum amount of RM250,000 required for direct bond investment.
“While bonds are another asset class to have as part of a diversification strategy, the amount of funds to be put in this category depends on the risk appetite of investors,” SFP's Tan says.
“One has to periodically review and rebalance one's investment portfolio. In an environment of rising interest rate, it is good to par down on investment in bonds and vice-versa,” he opines.
Interest rates and bonds have an inverse relationship.
“When inflation and interest rates heat up, bond funds will lose value. Your best investment strategy here is to cut back on these funds if you have significant exposure. Favour short-term and intermediate bond funds and sell or avoid long-term funds. The latter can get hit hard when interest rates and inflation go up,” CTLA's Lee explains.
“As a fixed-income instrument, bonds are often misunderstood by the average investor who think that these instruments are safe. But returns aside, bonds do carry risks, including the risks of default, early redemption, rating downgrade and management, among others. Hence, selection of the right bond fund is important to avoid a loss. So, investors will have to be careful and seek advice from the right professionals,” he adds. By CECILIA KOK
Legendary investor Jim Rogers is a big-time commodity bull. His reasoning is simple: as the global economy grows, so will demand for commodities.
Over the last one year, the world has witnessed a strong rebound in the prices of commodities, especially that of crude oil and crude palm oil. Most analysts believe the prices of these commodities would continue to rise as the global demand is expected to remain strong, while production of some of these commodities would remain tight.
This is partly due to poor weather conditions and natural disasters like flood that has affected coal production in Australia and crude palm oil in South-East Asia.
Also, the weakness of the US dollar will also contribute to the increase of commodity prices.
There are several ways that investors can ride on the commodity rally this year. These include directly buying into the shares of companies involved in businesses that handle these commodities, such as plantation companies; buying into commodity-themed mutual funds; or buying into future or options.
“Most Malaysians do not have much exposure to futures and options, but these are some good investment tools for investors looking to improve their overall rate of return from their investment portfolio,” says Oriental Pacific Futures Sdn Bhd marketing director Eunice Choo.
“The beauty of futures trading is that it is a two-way market, where one can buy (long) in a bull market or sell (short) in a bear market. This means that one can either buys first and sells later, or sells first and buys back later. You can always trade in futures products, regardless of whether it is a bull or bear market,” Choo explains.
“But futures trading is a high leverage investment, so one must always assess the risks properly before entering a trade,” she warns. By CECILIA KOK
It's widely expected that this year will see a further strengthening of Asian currencies, including that of the ringgit, against those of developed nations. The Chinese yuan, or renminbi, in particular, will remain very much in focus, as there have been hints of up to a 5% rise against the US dollar this year. In general, there are several ways that one can invest in foreign currencies, including opening a foreign currency account with financial institutions, buying assets denominated in foreign currencies, or simply trade live in the foreign exchange market.
“One's objectives of investing in foreign currencies have to be clearly defined. Some people invest in them as savings for children who will be pursuing studies overseas, while some others do it purely for investment gains,” SFP's Tan says.
“Investment in foreign currencies has its inherent risks; the appreciation and fall of a particular currency depends on the country's economic, social and political environment. It is recommended that one seek professional advice before buying into this instrument,” he adds. By CECILIA KOK
Exchange Traded Funds (ETFs) are open-end index tracking funds or trusts that are listed and traded on the stock exchange. An ETF tracks an index, commodity or a basket of assets like an open-end fund but trades on the exchange like a stock.
“The advantage for a retail investor buying into an ETF is that it offers diversification. The fund owns a basket of securities so if a fund tracks the FBM KLCI, you will have exposure to 30 stocks instead of just one stock,” said i-VCAP Management Sdn Bhd chief executive officer Mahdzir Othman. i-VCAP is the manager of the MyETF Dow Jones Islamic Market Malaysia Titans 25.
Mahdzir added that the performance of an ETF largely depends on its underlying benchmark. This means that ETFs, as in investing in equities, will experience market volatility and the ETF's performance will be affected by the performance of its component stocks or bonds.
Local financial companies have been slow to launch ETFs in Malaysia, with only five listed on the local stock exchange. However, there is a plethora of ETFs that retail investors can access in the global markets with ETFs making up 1.5% of total daily trading on the Singapore Exchange and some 40% of daily turnover in the United States.
Mahdzir says it is cheaper to buy into ETFs than as compared with normal mutual funds, as the former is passive fund while the latter is actively managed.
MRR Consulting investment adviser and managing partner Ooi Kok Hwa says that investors pay about a 5.5% sale charge (also known as front-end load) for normal mutual funds whereas they pay a normal brokerage fee of 0.7% for ETFs. By JEEVA ARULAMPALAM
Investors largely regard gold as a safe-haven asset, be it in the form of purchasing gold bullion coins or gold bars. Gold is seen as an investment tool offering long-term protection against inflation and a hedge against the US currency. But as equity markets rally and investors' risk appetites grow, the appeal for precious metals such as gold, silver and platinum as an alternative investment has somewhat softened. Gold spot price was trading above US$1,300 this week. However, investment managers have taken a longer-term view that gold price is likely to remain up alongside other commodity prices and as investors look for a long-term hedge against weakness in the US dollar, euro and Japanese's yen. They have cautioned though that prices could correct if the United States starts moving in on monetary tightening measures this year.
Aside from buying physical gold in the form of coins or bars, local investors can open up investment accounts at local banks such as Public Bank, whereby investors can buy and sell gold at daily quoted prices in ringgit using a passbook. By JEEVA ARULAMPALAM
ART When it comes to investment in collectibles such as art, which include paintings, sculptures and handicrafts, luck and timing are the main determinants of the rate of return. There's no fixed rate of return, as it is a subjective matter, depending on how much the buyer is willing to pay for that particular piece of creativity.
While still at an infancy stage, art investment in Malaysia has been gaining popularity over the last 20 years. One has to note, though, that most art collectors here are in not purely for monetary gains.
But as RogueArt Sdn Bhd director Beverly Yong puts it, the “returns” on art investment are often intangible. One being the gain of aesthetic and emotional satisfaction, while knowing that one is also contributing to creativity and the cultural heritage of the country.
“If one is knowledgeable and has good access to the works of major or emerging artists, one could build a collection, which would probably increase in value over the long term.
“Buying and selling art regularly for profit certainly requires one to have knowledge, a strong network and real engagement with the scene,” Yong emphasises. By CECILIA KOK
In October last year, three bottles of Chateau Lafite 1869 vintage went under the hammer for a record price of HK$1.8mil (RM705,000) in Hong Kong. That's reportedly the world's most expensive wine ever sold in an auction, and the sellers must have been laughing all the way to the bank.
Fine wine not just any wine can be a good investment, as there is a growing global demand from increasingly discerning consumers, especially from emerging economies, who are scrambling for the “limited” production to epitomise their growing affluence or improved social status.
Fine wine has a lifespan of 50 to 100 years, Vintage Assets Pte Ltd executive director Lionel Lau says to point out the fact that investors can therefore buy and keep those prized bottles for a prolonged period and wait for the right price to sell for a handsome profit.
“This investment is more suitable for those with a medium to long-term view,” Lau explains, adding that returns can range widely from 12% to 30%, with minimum initial investment starting from 5,000 (RM24,300).
“When investing in fine wine, it is best to buy in cases of six or 12 bottles, because bottles sold in their original box can actually fetch a much higher price in the secondary market, compared with individual bottles,” Lau says.
Prices of fine wine can be tracked via what is generally regarded as the world's “de facto” wine-trading platform at the London International Vintners Exchange, or Liv-ex.
“One can be sure that the prices of fine wine will continue to rise because the limited production by reputable merchants are insufficient to meet the fast-growing global demand,” he says.