By Chan Quan Min
Are you putting your money in the right place for you? Get to know the three major popular asset classes for investors and the strategies that come to play with each in this week’s four-part series.
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Few investors can be content with earning just over 3% per annum in interest in a fixed deposit account with a local bank. What more when that meagre rate of interest is earned on sizable savings of tens of thousands of ringgit, or more.
All it takes to invest in shares or managed funds is a spare few hundred ringgit, ever since board lot sizes were reduced to 100 units a decade ago.
But a deposit at a local bank remains one of the safest possible places to keep your cash. In Malaysia, bank deposits are fully insured up to RM250,000 per depositor per member bank.
Unfortunately, individuals with money holed up at the bank will see the real value of their savings erode away because of inflation.
Since September 2013, gradual cuts in government subsidies have kept inflation high. The monthly inflation rate has stayed above 3.2% all this year.
Investors the world over, not just Malaysia, must now make a choice between “reduced real returns (possibly even negative) or increase their allocation to equities and thus the level of risk,” chief investment strategist at Standard Chartered Bank’s wealth management arm, Steve Brice told KiniBiz.
To beat inflation all but the most timid of investors have at some point considered putting a portion of their money to work in one of three popular asset classes: stocks, bonds and property.
Each is different. Stocks and property are the most familiar to the individual investor. It also helps that Malaysia has a liquid market for both asset classes with an active base of investors.
A variation on investing directly in companies listed on the stock exchange is buying a pre-determined basket of securities as a managed fund or unit trust, which gives the benefit of a diversified portfolio with minimal effort.
Amanah Saham Nasional Bhd is one such fund offering investment units for bumiputera investors. Dividends paid out to unit holders are inflation beating at about 7% per annum.
Bonds an option during uncertainty
Corporate bonds, on the other hand, are a little harder to participate in. High entry costs keep the average individual investors out, leaving rich pickings to institutional investors and high-net worth individuals.
But things are changing. A way for companies to seek financing from the general public, corporate bonds have of late become more accessible to individual investors mainly through wealth advisors.
The growth of Islamic finance in the past decade has also helped broaden the appeal of sukuk or bonds issued according to Islamic principles.
Down south, high-net worth individuals are clamouring for high-yield corporate bonds after a choppy period for Singapore’s stock market and government restrictions on property speculation, Reuters last month reported.
Somewhat like Singapore, the local bourse is showing less promise after an unprecedented bull market that has lasted close to six long years.
And Singapore is not alone in the region for introducing curbs on property speculation. Bank Negara late last year introduced macro-prudential measures such as tighter financing requirements and higher taxes on property purchases.
The measures have worked to take some of the froth off the property market, cutting new property sales by almost a half in the first quarter.
Cut the froth
Property can serve a dual function as both a home and a store of wealth, making it the one big investment almost every individual aspires to in their lifetime.
Speculators have long realised that home loans or mortgages can be used to great effect as leverage. For no other asset class will a bank lend an individual a sum multiple times their annual salary.
Also, property investors get full exposure to capital gains on the value of their purchase with an outlay typically just one-tenth of the initial investment.
However, this advantage has been eroded to some degree by a property gains tax and Bank Negara rules limiting the margin of finance to 70% from the third property purchase onwards.
Industry players say this will be a year of price consolidation, after years of soaring property prices.
Data seems to suggest that property is still a viable long-term investment. The market for prime residential locations is evergreen and will remain so.
Bursa not the favourite of foreign funds
It is well known that valuations on the local bourse are close to reaching their ceiling, dissuading foreign investors from jumping in.
Steve Brice
Steve Brice of Standard Chartered may still “prefer global equities to other asset classes” but favours other global equity markets to Malaysia. His view is shared by several international fund managers, such as BlackRock Inc.
“Malaysian stocks are clearly not that cheap, but they are not excessively expensive. That said, we see better opportunities in other equity markets. Europe remains our preferred market, followed by the US which appears to have strong visibility in terms of the near term earnings outlook,” Brice said.
“We also prefer other markets in Asia such as Korea, which is very cheap and leveraged to both the US and China economic recoveries, and India, which looks set to embark on multi-year reforms,” he added.
Local brokers, however, prefer to keep their investments in the country but advocate a stock picking strategy to be explained at length in tomorrow’s part two. Tomorrow’s piece will also look at stock market investment strategies relevant to recent developments in the economy and the equity market.
Parts three and four later this week will explore the bond and property investments in greater depth.
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