Don't put all your eggs in one basket

PUBLISHED : Sunday, 23 October, 2005, 12:00am
UPDATED : Sunday, 23 October, 2005, 12:00am

Are investors sleepwalking towards disaster? Despite the headlines in recent weeks, little attention has focused on how to prepare financially for a bird flu outbreak if it happens.

In the face of so much uncertainty, financial advisers admit to a little head scratching over the issue, saying its difficult to know what's right. However, they agree most investors are far too complacent about the impact.

Phil Neilson, Hong Kong-based managing director of ING Financial Planning, said he was revising his thinking in step with the changing picture and was now a lot more worried. This week, he is planning a strategy review to assess the growing risks. What was likely to emerge, he said, was a mandate advising clients to adopt a more conservative stance. He believed the risks were serious enough investors should lighten up on equities, shift towards bonds and cash, and rotate out of sectors that could feel the impact.

It is an action plan that amounts to a general softening of risk rather than pulling up stakes and heading for the bomb shelter. For example, an aggressive investor holding 75 per cent of his assets in equities might want to lower that to roughly 50 per cent - an allocation normally considered balanced.

In addition, it might be a good idea to sell down some shares in industries most at risk, including airlines, hotels, and travel and leisure companies.

To maintain the 50 per cent equity allocation, try buying in more defensive areas such as health care, drug companies and alternative food producers such as beef exporters and organic farms. Before doing any buying, however, make sure you do the homework. Sectors that might at first appear safe havens, such as energy companies, could also blow up during a crisis if the global economy slows dramatically.

Any strategy that attempts to time the market by exiting ahead of an anticipated crisis comes with some risk. If an outbreak never happens, or is much less severe than anticipated, the stock markets may rally quickly, leaving cautious investors sidelined. 'If history has taught us anything, it is that the time in the market dictates better returns rather than trying to time the market,' Mr Neilson said.

Perhaps the biggest mistake anyone could make is to up the ante at this stage. It would be dumb to buy a flat or investment property at this time, he said, unless it was a particularly a good deal or had special appeal.

Paul Stefansson, a Singapore-based regional director with Ipac, said that while the news might look bad, it was important to keep your view in perspective. Some of the biggest stock market gains happened in the face of terrible social and environmental catastrophes. Look no further than the Wall Street boom after the second world war. Stocks followed a consistently rising trend despite worries from the Korean war to the Cuban missile crisis.

'There are always problems in the world, and instead of looking at problems as a crisis, if you are wise you look at it as an opportunity to buy things at a fair price,' he said. 'What bird flu is going to do if it happens, is it is going to give us a sale.'

Ensure your portfolio is well diversified across different geographic zones and asset classes. Too often local investors fail to look beyond their borders to invest in uncorrelated markets. Spreading money around the globe could be especially important in hedging risk if the virus breaks out in an uneven fashion, potentially devastating some economies more than others, much as Sars did to Southeast Asia, Mr Stefansson said.

Be prepared to hit the 'buy' button on your online broker if equity markets succumb to waves of fear. Those who did so during the Sars crisis scooped stocks and property at 50 per cent discounts to today's prices, he said. This approach requires the emotional intelligence to run against the herd but can be difficult for inexperienced investors.

To get around the problem, mentally divide your portfolio into four asset classes. Group stock and property holdings together on one side, and cash and bonds on the other. As markets stampede in different directions, periodically rebalance to capture changes in value. The approach is designed to take the emotion out of stressful decision making for investors and can lead to smart buys.

'Unfortunately when the stock market has a sale no one tells you how low the sale is going to go and you have to have a little bit of guts ,' Mr Stefansson said.

Daniel Chan Po-ming, Hong Kong-based senior strategist with DBS Bank, said most of the big financial players had adopted a wait and see approach because they saw few alternatives. 'We want to be proactive, but the problem is what assets can you invest in?' he said. 'If the disease becomes deadly, the effect of investing in different assets is of no use because the global economy will suffer.'

In a panic, he said billions could head for the exit at the same time, sending equity prices into a tailspin and leading to a meltdown in the bond market. About the only winners would be highly liquid investments, including cash, short-duration bonds and gold.