Investors will need to set realistic targets

PUBLISHED : Sunday, 27 December, 2009, 12:00am
UPDATED : Sunday, 27 December, 2009, 12:00am

My biggest wish in the coming year is to make a million bucks by embarking on a totally risk-free investment. Yeah, well, investors are prone to fantasies of this kind, especially when reality is so much more complicated.

So let us shun dreams and contemplate the coming year with an earnest hope that us investors can get real. In practice, this means several things. Naturally, at the top of the list is the realisation that a totally risk-free investment is either a myth or a guarantee of placing money in a ludicrously low-yielding instrument that, as inflation rises, will be more than likely to shrink the real value of the investment.

Grown-ups in the investment world have learned to live with risk but constantly seek ways of achieving that delicate balance between risk and reward. That balance is in question at the moment amid talk of an 'asset bubble' emerging in Hong Kong. As these bubble warnings are mainly coming from the government, it is wise to treat them with circumspection, but clearly asset prices have shown a remarkably strong recovery from the depths reached earlier in the year. This suggests that the great equation which sways all asset markets - the battle between fear and greed - seems more likely to see the pendulum swinging in the direction of greed over fear in the short term.

Thus, in the coming year, investor discipline is more important than ever. Investors tempted by the lure of even greater profit need to set realistic targets to satisfy their hunger, and once this is reached, they should not dither over selling assets whose prices have reached the target level.

The temptation to hang on in a rising market is considerable and causes much regret when prices start zooming down. This begs the question of what is reasonable, but too often investors look in the rear view mirror for an answer. This year they saw the Hang Seng Index rise by some 50 per cent and may therefore assume that the same can be achieved in the coming year. That defies logic, so in my attempts to set targets I will probably settle for gains in the region of 15 to 20 per cent, which takes account of the fact that the market is likely to rise, at least in the first half of the year, but at a decidedly more modest pace.

Thankfully, the equities market is far from being a single entity, therefore, even in circumstances when it seems that all the really good opportunities have already passed, it is still possible to find shares which have either lagged behind the generally rising trend or, for some reason, other than fundamentals, failed to become flavour-of-the-month counters.

Having been a lazy investor in 2009, I think the coming year demands more attention to value-stock picking. Most of us lack genius in this respect so we need to content ourselves with shares that have a readily understandable business, have underperformed the rest of the market and - although this is deeply unfashionable these days - have a consistent record of paying decent dividends. The latter is not an infallible guide to performance but a valuable indicator of consistency, and earnings growth. So let us try not to be too fashionable in 2010.

Meanwhile, over in the property market, where most Hong Kong investors hold the bulk of their assets, there is relatively little hope of sanity prevailing. This is normal here so no one should be unduly alarmed. However, after a year when considerable attention has been drawn to property developers' tactics of misleading buyers to sell new projects, surely it would be a relief to finally see some firm government action to prevent dubious sales techniques.

The growing development of reits, or real estate investment trusts, continues to provide a very useful way for smaller investors to gain direct exposure to the property market without the hassle of maintenance responsibilities and with the advantage of instant liquidity, which is not available to those selling bricks and mortar.

The year looks set to be one in which exciting property prospects are more likely to be overseas than at home and reits provide a way into these markets. Given that Hong Kong investors are saddled (or is it benefit from?) the US dollar peg, they have good reason to prefer the currency-risk-free option of sticking with US-dollar-denominated assets which, in this case - and for the slightly brave - means having a look at the US property market after its terrible knocks.

The US property market is now showing some signs of recovery, leaving plenty of scope for the upside. The beauty of the US market is the wide variety of listed reits covering not just residential and commercial property but specialist areas such as medical, storage and retail sectors from malls to shopping centres.

A recent encounter with my British bank reminded me just how flexible and sophisticated Hong Kong's retail banks are. They are never fazed by currency switching and a variety of more complex currency plays, whereas this British bank, at a branch supposedly catering to offshore customers, presented all kinds of problems when engaged in the simple task of switching some funds into US dollars. This is a roundabout way of saying that Hong Kong investors can enjoy the opportunities of the currency markets without too much trouble and should be thinking whether the current depressed state of the US dollar is really likely to continue.

Finally, the greatest joy of 2010 is almost certain to come from confounding gold buffs, a determined breed who thought their time had most certainly come in 2009 but refuse to recognise that in real money terms the gold price remains firmly below that achieved in the mid-1980s.

Gold had a good run this year and I was happy to leap on the bandwagon for a while, but I have now leapt off and hope that others will do the same before, yet again, gold does what it generally does - not glitter, but disappoint.

Stephen Vines is an HK-based journalist and entrepreneur