Tips from the top

PUBLISHED : Monday, 09 July, 2012, 12:00am
UPDATED : Monday, 09 July, 2012, 12:00am


It's a poor climate for investing. Equities are volatile and prone to regular sell-offs on euro-zone-related news. Hong Kong interest rates are low, depressing yields on deposits and bonds. The sole investment bright spot - yuan-denominated instruments - are dimming somewhat as the outlook for yuan appreciation starts to cool.

People who look at investing see a lot of risk with little upside.

But there is a cost to being uninvested, and that's the steady, inflation-aided erosion of the spending power of one's savings. Investing is prudent, if not necessary.

So, with the full awareness that returns are paltry and risks are high, Money Post asked advisers and analysts basic questions about investing in today's difficult market. This is what they have to say:

I'm offered a lot of yuan investments. What's the outlook for the currency?

Paul Mackel, head of Asian currency research, HSBC, responds:

How times have changed. The yuan has actually weakened against the dollar so far this year. And guess what? There has been no international outcry.

After a long period when the Chinese currency appreciated against the dollar, it is reaching the point of being fully valued. Look at China's current account - the large surpluses of previous years no longer exist, implying that the yuan is much less undervalued than before. This has changed thinking on the yuan. It is no longer a one-way bet on appreciation.

This is a sign that the broader discussion around the currency is moving on. It is much less about slow and steady appreciation, as the yuan has already risen 25 per cent against a basket of currencies since it was de-pegged from the dollar in 2005. Today it is more about liberalisation, currency flexibility and internationalisation. The emergence of the offshore yuan market in Hong Kong is a testament to the internationalisation drive.

If the international community was concerned about the value of the yuan, we could have expected much more political clamour surrounding the issue. But as we saw at the recent G20 leaders summit in Mexico, officials appeared relaxed. Perhaps it was the sunshine and tequila or maybe larger issues, such as the euro-zone debt crisis, which diverted their attention. Whatever the case, the wording in the G20 communique about the yuan was instructive.

Officials welcomed China's move to make its currency more flexible. There was no mention of any significant undervaluation of the currency, as had been the case at previous high-level meetings. It was as if the international community accepted that the case for a stronger yuan no longer stacks up.

A word of warning: the high level political discussion concerning yuan appreciation has not gone away. Not with a US presidential election just around the corner. But the case for a much stronger yuan is certainly less than it used to be.

Should one buy structured products (for example, instruments that link to share prices or currencies, with the possibility of extra yield)?

Robert Jones of FCL Advisory responds:

Structured products are typically packaged into such a complicated form that investors believe they are buying something when they are actually selling one or more call or put options.

For example, if you give a bank some money to 'buy' a structured product, and you earn extra yield if a particular index, currency, equity, commodity, or other price level stays within a certain range, or falls above or below a particular level, but you lose money otherwise, you haven't purchased anything! You have actually sold the bank put or call options.

Structured products are often complex because derivatives involve mathematics and hedging principles that go well beyond the average person's comfort zone.

Like any investment, structured products involve a bet on markets, only in this case the punter is betting against professional odds-makers who work in teams using advanced maths, powerful computers and cutting-edge software.

Imagine Suzy Wong (the average Hong Kong retail investor) settling in at the mahjong table ready for a night of yum cha and mahjong. The person serving drinks, dim sum, and other tasty treats is the beautifully dressed and impeccably mannered John 'The Peak' Chow (the prestigious banker with the pedigree - who by the way, doesn't have a clue how these products are created, hedged or risk-managed). He is so handsome and beautiful that even if Suzy lost all of her money, she'd be happy that she was served by someone with such dashing personality, background, and looks.

Suzy settles in with her wad of money on the table. She is unaware that the three others at the table playing with her (the guys behind the scenes at each bank that create, hedge and manage structured products) have these backgrounds: Ed has a Cal Tech degree in fluid dynamics, Bernie has a MIT degree in quantum mechanics, and Eliza has an Oxford professorship in nuclear engineering.

To truly level the playing field, Suzy, and other retail investors, should consider enrolling in a significant number of derivatives courses until she can roughly estimate the costs, the risks and the potential rewards.

Once she achieves this level of competency, it's time for her to earn some serious profits by working somewhere creating and selling structured products instead of buying them.

I'm looking at Indian bonds but I'm concerned about the currency. Why is the rupee weakening?

Manpreet Gill, senior investment strategist, Standard Chartered Bank, responds:

The Indian rupee has largely mirrored the behaviour of regional Asian currencies, following them lower from their 2012 peak in early February. But rupee weakness has been more pronounced: the currency is down 13 per cent against the US dollar since early February, compared with a 2 per cent drop for regional currencies in aggregate.

There are four reasons for this. First, higher interest rates and slowing economic growth have made Indian equities less attractive to foreign investors, denting demand for the Indian rupee.

Second, there is concern around the sovereign rating. Standard & Poor's in April warned that it would downgrade India's debt rating to junk status unless the government cut the national deficit. Markets worry a downgrade could trigger foreign investor outflows, which would involve selling the rupee.

Third, India's current account deficit widened to minus 4.5 per cent in the first quarter, which means there is greater demand for foreign currency relative to Indian rupees. Without rising inflows elsewhere to plug the gap, this imbalance has created rupee weakness.

Fourth are global factors. Greater concern around peripheral euro area debt cuts investor appetite for risky emerging market assets.

The euro-zone crisis has cut into demand for emerging-markets assets, including Indian assets, translating into diminished demand for the rupee.

What is the cost of being uninvested?

Adam Tejpaul, head of investments of J.P. Morgan Private Bank Asia, responds:

Ten thousand Hong Kong dollars is not what it used to be. Precisely, it's only worth HK$8,000, if you compared the sum to what you could buy one decade ago. Inflation eats at the purchasing power of money, and this is the cost of being uninvested.

While choosing the right investment is important, many argue that picking the right timing is even more critical. I wouldn't disagree, but think it's not market timing but the time in the market that counts.

If you stayed invested in the Hang Seng Index over the past 20 years, you would have captured a 15.7 per cent compounded return. However, if you missed the 40 best days for the market, you would have seen a negative 6.1 per cent compounded return.

One can't sit on cash and hope to catch the market bottom perfectly. The opportunity cost for being wrong is too great. Uncertainty and volatility suggest the only 'safe' approach is to be consistently invested, perhaps buying a little bit at a time.

How can one invest safely but still have a chance to participate in a stock market rally, if one happens?

Carl Berrisford, analyst, UBS CIO Wealth Management Research, responds:

Hong Kong-listed convertible bonds offer attractive yields relative to straight bonds.

CBs are bonds convertible into the shares of the issuer. The right to convert into shares becomes profitable if the share prices rises above a threshold during the life of the bond.

CBs therefore provide downside protection. Equity markets are prone to big drops but firms rarely default on their bonds. Firms rarely default on their bonds. Assuming there is no default, investors will receive the principal and interest payment on the bond.

However, if equity markets take off, the bond holder may be able to convert the debt into the firm's shares at a low price, and sell immediately for a quick profit.

Several Hong Kong dollar- and yuan-denominated CBs yield in the range of 1.5 per cent to 5.25 per cent, or levels that are very similar to comparable 'straight' (that is, non-convertible) bonds.

This suggests that the equity option embedded in CBs is cheap. Investors should buy those CBs that trade with the most liquidity, rather than buying the bond with the highest yield.

What is a good high-risk, high-return investment?

Marc Lansonneur, regional head of investment teams, Societe Generale Private Banking (Asia-Pacific), responds:

Clients wishing to take a higher risk for higher returns might consider currency options; for instance, buying a 'USD call JPY put', which is bet that the dollar will appreciate against the yen.

A six-month contract with a strike price of 85 yen per US dollar might cost about 0.80 per cent (or US$8,000 for a US$1 million contract).

If the yen declines against the dollar such that one US dollar could buy 86 yen, or more, the contract would pay out.

The investor in the worst-case scenario would lose the US$8,000 he paid for the contract. The upside might see many multiples of that sum, especially if the yen's decline is rapid in the coming months.

Such transactions are for experienced investors familiar with derivatives products.

Myanmar is opening up. Does this present any good investment opportunities?

Mark Matthews, the head of research, Asia, for Julius Baer, responds:

The short answer is no.

Annual growth in Myanmese gross domestic product has risen to about 7 per cent, which is good but hardly the transformational 10 per cent to 14 per cent GDP growth seen in China in the past decade.

The only listed companies with significant exposure to Myanmar are energy firm Interra and property company Yoma. Both are listed in Singapore and both are tiny.

Foreigners can't buy land, and getting money is difficult. So why are there so many investor conferences on Myanmar?

Perhaps the novelty of a country that is opening up - Myanmar in November 2010 held its first elections in 20 years.

This move from military government to democracy is a work in progress. But it has led to a suspension of sanctions by the US, the European Union, Japan, Canada and Australia, opening Myanmar to investors and export markets.

The new government appears genuinely reformist, working with the International Monetary Fund to bring order to the exchange rate of the kyat, and about giving its central bank more independence.

Much remains to be done to lure foreign investment into a country that has had no reliable rule of law or infrastructure for safe investment.

But access to Myanmar has improved, with visas on arrival and several international airlines requesting access. Many companies are looking to do business there.

Myanmar has substantial natural resources, a large, youthful population (60 million inhabitants with an average age of 27). It is about the size of France and the Netherlands put together.

Let's go back to the Singapore-listed Interra and Yoma. The firms' share prices have tripled and quintupled, respectively, reflecting for the most part a building sense of optimism about Myanmar. Property prices in Yangon have quintupled in the past year and are now more expensive than Bangkok.

Right now the investment story is all about potential. That story is compelling but prices have exceeded reality.