Adjusting to the new financial landscape

PUBLISHED : Monday, 05 June, 2006, 12:00am
UPDATED : Monday, 05 June, 2006, 12:00am

Hong Kong is experiencing resurgent growth but the picture is less than rosy for some property owners and baby boomers nearing retirement

HONG KONG'S 'millionaire factory' is back in business after six years in mothballs, turning out a rising class of new wealthy post-financial crisis property owners and altering the investment landscape for savers.

Buyers who timed their return to the property market at the lowest point to which it sank following the 1997/98 Asian financial crisis would by now have nearly doubled their net worth.

After collapsing by 70 per cent as measured by the six-year retreat in secondary market selling prices monitored by Midland Realty - from a peak of $6,208 per square foot in June 1997 to a trough of $1,854 in April 2003 - property prices have since recovered to $3,216 per square foot (see chart).

That means a 750 sqft apartment bought for $1.39 million just three years ago would now be worth $2.41 million.

The process has all but eliminated the negative equity threat that loomed over Hong Kong's financial sector at the height of the crisis and has triggered a domino 'wealth effect' that is contributing, along with the city's piggy-back ride on the mainland economy, to resurgent growth.

But for some property owners who clung to their apartments on the way down, and for post-war baby boomers now approaching retirement, the picture is less rosy, according to wealth managers. For them it is now decision time - to hunt for yield enhancing investments to plug the gap left in retirement funds by poor returns or insufficient savings, or to extend their working lives.

In the view of Hans Goetti, managing director and investment strategist for Citigroup Private Bank, the 'greying' of population pyramids around the world and the approaching retirement of post-war baby boomers with inadequate savings has begun to skew demand for investment products away from plain vanilla fixed-income assets to equity-type investments. And that trend, he said, was good news for Asian stock markets.

In Asia, where comparatively small proportions of household savings portfolios are invested in equities, the demand for higher investment returns from the ageing population of savers is set to trigger a growing demand for stocks.

'In Korea only 7 per cent of household savings are now invested in equities. In Japan it is 11 per cent, versus 21 per cent in Europe and 34 per cent in the US. So in our opinion, this will become a big source in demand for Asian equities,' Mr Goetti said.

Helping to drive that search for higher yields on retirement investments will be the dawning realisation that the Mandatory Provident Fund system introduced in December 2000 will not do the job.

HSBC, which polled 2,700 respondents towards the close of last year, found that 80 per cent did not believe they were making sufficient provision for their retirement.

And depending on the rising tide of property prices to restore net wealth and help refloat retirement finances would be risky, as the latest turbulence in the market caused by interest rate concerns demonstrates.

'Hong Kong property is liquidity driven and is subject to mood swings which can be extreme,' Mr Goetti said. 'Anecdotally, there is some cooling off at present.'

Also, with prices on the march after a six-year deflationary spiral, the focus of investors must now shift from safe-haven capital-guaranteed products to yield-enhancing assets that will help protect the purchasing power of retirement funds, according to the experts.

Under a scenario of a return to the days of inflation running at up to 5 per cent, a 10-year US Treasury note now yielding about 5 per cent simply will not be enough, warned Bruno Lee, head of wealth management for Asia Pacific in HSBC's personal financial services division.

'At a targeted return of 70 per cent [the investment return required to preserve the value of a retirement nest egg at an inflation rate of 5 per cent], a retirement bond or savings account will clearly not do the job,' Mr Lee said.

Savers who wish to see their investments beat the rate of inflation should therefore now move up the 'risk/reward' ladder and consider assets such as higher yielding emerging market bonds, or perhaps globally diversified equity funds, wealth managers said. The appeal of alternative investment products such as artworks or commodities, including the inflationary hedge traditionally offered by gold, was also on the rise.

'As we move out of the deflationary environment, capital gains become more important, which has meant that a whole range of asset classes not normally regarded as mainstream, such as artworks or offshore property, have become key investment areas,' Nomura analyst Sean Darby said.

The result was that, whereas banks were formerly competing for custom by offering rate-based investment products, they were now promoting to their clients the advantages of higher risk hedging instruments, he said.

Looking to China for yield-enhancing investments was an option, said wealth management professionals, but came with attendant risk. The search for value in the volatile mainland market, which is subject to the impact of policy reforms, unpredictable liquidity flows and endemic speculation over the exchange rate of the yuan, was best left to the professionals, they said.

Value Partners, a Hong Kong-based fund manager with US$3.4 billion in assets under management, adopted a mainland investment policy of 'buying the right business, run by the right people, at the right price' - a discipline that required intensive 'bottom-up' research on a case-by-case basis of individual companies, said senior fund manager Renee Hung.

'It is a different game for normal retail investors, because they don't have access to government officials, meetings with management, or access to various creative investment instruments such as convertible bond structures,' she said.

Investors who were concerned about risks associated with China could limit their exposure by investing in the mainland growth story via structured products, said HSBC's Mr Lee.

'People can buy China-related stocks listed on the Hong Kong market, the units of mutual funds that invest in the Hong Kong and China markets, and also some structured products offering different terms - some with 100 per cent principal protection with a guaranteed coupon of a couple of per cent and upside boosters linked in a rise to the underlying assets,' he said.

The bottom line for Hong Kong's wealthy individuals looking to increase returns is not to put all investment eggs in one basket - property or otherwise.

Investors should learn from the big sell-off of shares in May that they need to have a diversified portfolio, so that in times like this they could sleep well, said Katherine Cheung, head of Hong Kong distribution and regional marketing for Merrill Lynch Investment Managers,

the fund management division of US investment bank Merrill Lynch & Co.

For detailed views on the subject, see the stories inside.