The Week Explained: Low interest rates

PUBLISHED : Monday, 10 December, 2012, 12:00am
UPDATED : Monday, 10 December, 2012, 2:28am

We are stuck in a low interest rate environment likely to remain at this level for some time, not least because governments are competing aggressively to keep rates down to avoid an appreciation in the value of their currencies.

This is good news for borrowers, assuming they can obtain loans in this tough environment, but bad for cautious savers and investors who have modest aspirations for the growth of their funds but would really like to beat inflation.

Putting money in various interest-bearing bank accounts is very much akin to giving it away as no-frills deposit accounts offer no chance of matching the rate of inflation with their interest payments. Even the slightly riskier option of foreign currency deposits (because you need to take a view on their relative strength compared with the Hong Kong dollar) offers few alternatives. Among major currencies accessible through local banks, the highest interest rates are on New Zealand dollars followed by sterling, but even these currencies are paying 1-2 per cent interest on simple deposits.

Government and corporate bonds offer high yields, but the price of entry can be excessive for small investors, who generally opt for bond funds. The problem here, as with all funds, is that money is taken out of the investment by high management charges. However, this has been a good year for bond funds, especially the European funds, with year-on-year returns in the teens - which is far better than the return on most "safe" investments.

Another option is high-yielding stocks, a subject discussed in this space previously. The argument made then remains today, namely that blue-chip stocks are really not very risky and offer both the prospect of capital gain and yields that are substantially higher than those offered by bank deposits.

Hong Kong blue chips are trading on historic yields of around 3 per cent, which is roughly in the mid-range of the yield ratio in major world markets. Some of them, notably the London market, are offering higher yields, but many local investors are understandably concerned about adding a currency risk to their equity investments.

Therefore, investing in high-yield Hong Kong stocks - such as the two Bank of China counters, Hang Seng Bank and Sinopec - remains a good option from a yield point of view. Yet it is worth re-emphasising that yield alone is not a sufficient criterion for investing in shares. Some shares trading on higher yields are neither safe nor steady. Their returns can be very volatile, and with yields looking higher relative to depressed prices, they should not appeal to cautious investors.

The other, highly intriguing, option right now is residential property. The current price dip and generally sluggish state of this market offers some interesting investment possibilities for those looking for better yields. Strangely, yield is far less discussed in this sector than its more glamorous sibling - capital gain.

Figures from the real estate services firm CBRE estimated the overall yield on luxury residential property at 2.7 per cent in the first quarter of the year. A more recent estimate, published by the British-based Global Property Guide, puts average yields in Hong Kong at 2.8 to 3.6 per cent in May. However, we have yet to see figures on how the government's recent market intervention affected yields in the residential property sector.

Generally speaking, rental yields and prices move in tandem, and there is even a danger more rental property will come onto the market as investors decide to delay sales at current prices. Yet with yields around 3 per cent, a very modest level for Hong Kong, the returns on property investment remain fair with strong prospects for capital gain over the longer term even if prices fall further in the shorter term.

Meanwhile, Hong Kong, and elsewhere for that matter, still has its fair share of gold and silver buffs and others who just love investments with no yield whatsoever. If these precious metals were staging spectacular price gains, this could be overlooked, but this is not the case.

So, now is the time to think carefully about yield and sit out the investment downturn.