Investing is like gardening. You will reap what you sow if you stay the course through the harsh seasons
'Growth has it season. There are spring and summer, but there are also fall and winter. And then spring and summer again. As long as the roots are not severed, all is well and all will be well.'
In investing, know that time is your friend. Plant the seed of growth in the garden and in due season, you will reap what you sow. Impulse is your enemy, react to your fears and dig out the seeds before the season is over and you may never see the fruit.
Most importantly, stay the course. Let the uncertain years roll by, and face the future with faith. Do not let short-term fluctuations, fear, greed and news that have no meaning at all to your long term investing affect your judgment. The world markets too have their season but in the longer term will always grow, because their roots have remained strong and intact
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Hunt for cover as inflation storm blows at nest eggs
Top Print Edition Stories
Banks offering variety of products to priority clients, but it's a trade-off between risk and yield
By GENEVIEVE CUA
Tactical yield plays appear to be the order of the day among priority banking clients, as inflation jitters drive them to seek higher yields for idle cash.
Banks report a surge in the take up of 'premium currency' investments, where clients can profit from positions on currency pairs. Some banks like Standard Chartered Bank and DBS report a quadrupling of the volume of dual currency products.
Take-up of structured notes is also reportedly strong, particularly for structures with a fixed coupon feature and capital protection. Clients also want a call feature where the product could be unwound early. Stanchart, for example, reports around US$1 billion in sales of structured products between the fourth quarter of 2007 and the current period.
Ironically a good number of the products still do not adequately compensate clients for inflation. Dual currency investments are typically very short term option contracts of up to a month, giving clients flexibility on reinvesting their money. But structured notes may have a holding period of two-and-a-half to five years. This suggests that clients could be stuck with negative real returns for a fairly long time if inflation trends are sustained.
Citibank head of wealth management Salman Haider says: 'Markets have priced in a severe stagflation scenario. We don't think that will come to bear. A slowing of the US economy will help temper inflation... We're seeing a shift across the board as clients look for more liquid instruments.'
DBS managing director and head of Treasures priority banking Pearlyn Phau said: 'We think the second half outlook will be more positive compared to the first half. Rates will trend upwards, and inflation should taper off towards the end of the year as the global economy softens. Markets are now looking for a bottom.'
Priority banks cater to clients with investible assets of at least $200,000. Sitting in between mass banking and private banking, the segment is a growing and competitive one. Typically clients enjoy wider access to a variety of products that would not be available to mass banking customers.
While dual currency investments have long been a staple among priority banking products, Citibank and Stanchart have added a twist. Now clients can use gold as an alternative asset to the US dollar.
Citi launched its gold-linked premium account in January, and Mr Haider said take-up is 'pretty good and increasing'. Stanchart launched its facility in June. To date it has attracted US$40 million in funds.
Janice Poon, Stanchart general manager (wealth management) said: 'We structured (the gold-linked premium account) for the benefit of clients holding US dollars.'
The gold premium account works in a similar way to FX premium accounts where the client should be indifferent as to holding either of two currencies in a pair, or in this case to holding gold or the USD. The client will typically agree upon a strike price - this time for gold - and an interest rate. If the gold price moves above the strike at the end of the tenor, the client earns his principal plus interest. If gold drops below the strike, the client's principal and interest are converted to gold at the strike price.
On a recent structure by Stanchart, a client could earn an interest rate of 9.4 per cent per annum for a two-week tenor, or 10 per cent per annum for one month.
Meanwhile, structured products like Merrill Lynch's Jubilee Series paying 2.7 per cent in coupon over 2.5 years reportedly drew strong interest. Said Stanchart's Ms Poon: 'The market has been pouring money into very simple fixed rate structures with capital protection.'
But Singapore's inflation rate hit 7.5 per cent in April and May and the forecast has been raised to 5-6 per cent for 2008. With the structures, investors are still grappling with negative real returns.
Ms Poon said: 'If you are really concerned about inflation, you have to adjust your risk expectations. Nothing will give you a whiz-bang return in a very short period. If clients are unable to adjust their risk expectations, their yield expectations have to go down. That's why the structures sell well; they pay a higher rate than fixed deposits.'
On the Monetary Authority of Singapore's Opera site, a slew of structured products have been lodged, which are interest rate, credit or equity-linked. The notes pay coupons of between 2.7 and over 7 per cent for holding periods ranging from 2.5 to around 5 years.
Mr Haider says Citi clients are advised to have a three-pronged approach. One is to have an inflation hedge, which could be in the form of a commodities exposure. The second is to have assets that smooth out volatility, such as hedge funds.
'The third is that in the environment of negative real rates, make sure your strategic cash is getting more than money market returns, and not just sitting there eroding in value.'
Read more!
Banks offering variety of products to priority clients, but it's a trade-off between risk and yield
By GENEVIEVE CUA
Tactical yield plays appear to be the order of the day among priority banking clients, as inflation jitters drive them to seek higher yields for idle cash.
Banks report a surge in the take up of 'premium currency' investments, where clients can profit from positions on currency pairs. Some banks like Standard Chartered Bank and DBS report a quadrupling of the volume of dual currency products.
Take-up of structured notes is also reportedly strong, particularly for structures with a fixed coupon feature and capital protection. Clients also want a call feature where the product could be unwound early. Stanchart, for example, reports around US$1 billion in sales of structured products between the fourth quarter of 2007 and the current period.
Ironically a good number of the products still do not adequately compensate clients for inflation. Dual currency investments are typically very short term option contracts of up to a month, giving clients flexibility on reinvesting their money. But structured notes may have a holding period of two-and-a-half to five years. This suggests that clients could be stuck with negative real returns for a fairly long time if inflation trends are sustained.
Citibank head of wealth management Salman Haider says: 'Markets have priced in a severe stagflation scenario. We don't think that will come to bear. A slowing of the US economy will help temper inflation... We're seeing a shift across the board as clients look for more liquid instruments.'
DBS managing director and head of Treasures priority banking Pearlyn Phau said: 'We think the second half outlook will be more positive compared to the first half. Rates will trend upwards, and inflation should taper off towards the end of the year as the global economy softens. Markets are now looking for a bottom.'
Priority banks cater to clients with investible assets of at least $200,000. Sitting in between mass banking and private banking, the segment is a growing and competitive one. Typically clients enjoy wider access to a variety of products that would not be available to mass banking customers.
While dual currency investments have long been a staple among priority banking products, Citibank and Stanchart have added a twist. Now clients can use gold as an alternative asset to the US dollar.
Citi launched its gold-linked premium account in January, and Mr Haider said take-up is 'pretty good and increasing'. Stanchart launched its facility in June. To date it has attracted US$40 million in funds.
Janice Poon, Stanchart general manager (wealth management) said: 'We structured (the gold-linked premium account) for the benefit of clients holding US dollars.'
The gold premium account works in a similar way to FX premium accounts where the client should be indifferent as to holding either of two currencies in a pair, or in this case to holding gold or the USD. The client will typically agree upon a strike price - this time for gold - and an interest rate. If the gold price moves above the strike at the end of the tenor, the client earns his principal plus interest. If gold drops below the strike, the client's principal and interest are converted to gold at the strike price.
On a recent structure by Stanchart, a client could earn an interest rate of 9.4 per cent per annum for a two-week tenor, or 10 per cent per annum for one month.
Meanwhile, structured products like Merrill Lynch's Jubilee Series paying 2.7 per cent in coupon over 2.5 years reportedly drew strong interest. Said Stanchart's Ms Poon: 'The market has been pouring money into very simple fixed rate structures with capital protection.'
But Singapore's inflation rate hit 7.5 per cent in April and May and the forecast has been raised to 5-6 per cent for 2008. With the structures, investors are still grappling with negative real returns.
Ms Poon said: 'If you are really concerned about inflation, you have to adjust your risk expectations. Nothing will give you a whiz-bang return in a very short period. If clients are unable to adjust their risk expectations, their yield expectations have to go down. That's why the structures sell well; they pay a higher rate than fixed deposits.'
On the Monetary Authority of Singapore's Opera site, a slew of structured products have been lodged, which are interest rate, credit or equity-linked. The notes pay coupons of between 2.7 and over 7 per cent for holding periods ranging from 2.5 to around 5 years.
Mr Haider says Citi clients are advised to have a three-pronged approach. One is to have an inflation hedge, which could be in the form of a commodities exposure. The second is to have assets that smooth out volatility, such as hedge funds.
'The third is that in the environment of negative real rates, make sure your strategic cash is getting more than money market returns, and not just sitting there eroding in value.'
Read more!
Strategies for inflationary times
Defensive is the way to go to preserve the value of your money, and certain assets do that better than others
By ELKE SPEIDEL-WALZ
IN RECENT weeks, inflation has become the most decisive factor in capital markets and expected asset-class returns. How quick and to what extent inflation will rise will determine the future path of interest rates and asset-market performance. What is our outlook for global inflation and what consequences do we draw for asset allocation?
The short-term outlook is rough, but in the medium term, inflation rates are expected to decline from current high levels. Inflation will be higher and more persistent in the next few years than in the past. In the last five years, inflation was low due to the disinflationary effect of globalisation. World trade and global competition (labour and goods prices) became more intense, while deregulation and strong productivity growth had a dampening effect on prices.
In the next few years, this positive effect will gradually run out. The dampening effect of inflation from globalisation is fading as wages rise, particularly in emerging markets; the risk of new regulations and protectionism emerges; commodity price pressure continues (an inflationary effect of globalisation and strong Emerging Markets growth); and productivity growth declines.
While inflation will be higher than in the recent past, we consider a return to the levels of the 1970s unlikely.
The main reason is that global competition and open economies will continue to prevent price-wage spirals, at least in major countries. Central bank credibility has increased substantially and no further inflation pressure stems from fiscal policy, as was the case in the 1970s.
Last but not least, an important reason we see inflation coming down eventually is the growth outlook. Weak internal demand in the US and the Eurozone, falling capacity utilisation and rising unemployment do not create an environment in which higher input prices can easily be passed on.
Nevertheless, in the short term, uncertainty about the inflation outlook will weigh on financial markets. The reaction of inflation to the cyclical situation has always occurred with a significant time lag - 4-6 quarters from the cycle's peak in the past.
Why this lag? Prices are 'sticky' due to implicit and explicit contracts that are expensive to renegotiate. Consideration of competitors' price actions and information costs are other reasons. The most recent peaks in the output gap - the US, UK, Eurozone, Canada and Australia - happened around Q3 2007.
Consequently, from early 2009 we should see the cyclical dampening effect of inflation. As from spring 2009, the base effects from energy prices should also work in this direction, assuming oil prices will at least not be visibly higher than US$130 a barrel. While rising inflation is not necessarily bad for stock markets, the transition phase described above used to be uncomfortable for equities.
How do different asset classes perform under the outlined inflation scenario? The straightforward effect of inflation on asset- class return, as suggested by theory, has to be seen in the context of the current cyclical situation (overheating or growth slowdown) and structural trends that might enforce or counteract the straightforward impact (global competition and price-setting behaviour for goods and labour markets).
The value of adding an asset class to a portfolio stems either from the fact that it directly hedges against inflation or is able to yield attractive returns in times of rising inflation. We summarise the evaluation of the individual asset classes in the accompanying table.
The best inflation hedge is inflation-linked government bonds. The return outlook depends on the extent to which inflation expectations are already priced in and the benchmark inflation index is implemented in the linker (that is, Eurozone-harmonised CPI versus national headline inflation and core rates).
Asset classes that are able to yield attractive returns in the current inflation environment are commodities, hedge funds and real estate. The latter is currently suffering, however, from the ongoing adjustment process in many countries. While stock markets can perform positively in an inflationary environment (assuming central bank credibility), they suffer in the intermediate phase (the tug- of-war between the inflation-dampening effect of declining growth and inflationary effects of ongoing commodity price strength). Infrastructure investments can also offer a partial inflation hedge, depending on the underlying cashflow structure (inflation-linked payments).
The writer is deputy head of investment strategy group, Deutsche Bank Private Wealth Management
Read more!
By ELKE SPEIDEL-WALZ
IN RECENT weeks, inflation has become the most decisive factor in capital markets and expected asset-class returns. How quick and to what extent inflation will rise will determine the future path of interest rates and asset-market performance. What is our outlook for global inflation and what consequences do we draw for asset allocation?
The short-term outlook is rough, but in the medium term, inflation rates are expected to decline from current high levels. Inflation will be higher and more persistent in the next few years than in the past. In the last five years, inflation was low due to the disinflationary effect of globalisation. World trade and global competition (labour and goods prices) became more intense, while deregulation and strong productivity growth had a dampening effect on prices.
In the next few years, this positive effect will gradually run out. The dampening effect of inflation from globalisation is fading as wages rise, particularly in emerging markets; the risk of new regulations and protectionism emerges; commodity price pressure continues (an inflationary effect of globalisation and strong Emerging Markets growth); and productivity growth declines.While inflation will be higher than in the recent past, we consider a return to the levels of the 1970s unlikely.
The main reason is that global competition and open economies will continue to prevent price-wage spirals, at least in major countries. Central bank credibility has increased substantially and no further inflation pressure stems from fiscal policy, as was the case in the 1970s.
Last but not least, an important reason we see inflation coming down eventually is the growth outlook. Weak internal demand in the US and the Eurozone, falling capacity utilisation and rising unemployment do not create an environment in which higher input prices can easily be passed on.
Nevertheless, in the short term, uncertainty about the inflation outlook will weigh on financial markets. The reaction of inflation to the cyclical situation has always occurred with a significant time lag - 4-6 quarters from the cycle's peak in the past.
Why this lag? Prices are 'sticky' due to implicit and explicit contracts that are expensive to renegotiate. Consideration of competitors' price actions and information costs are other reasons. The most recent peaks in the output gap - the US, UK, Eurozone, Canada and Australia - happened around Q3 2007.
Consequently, from early 2009 we should see the cyclical dampening effect of inflation. As from spring 2009, the base effects from energy prices should also work in this direction, assuming oil prices will at least not be visibly higher than US$130 a barrel. While rising inflation is not necessarily bad for stock markets, the transition phase described above used to be uncomfortable for equities.
How do different asset classes perform under the outlined inflation scenario? The straightforward effect of inflation on asset- class return, as suggested by theory, has to be seen in the context of the current cyclical situation (overheating or growth slowdown) and structural trends that might enforce or counteract the straightforward impact (global competition and price-setting behaviour for goods and labour markets).
The value of adding an asset class to a portfolio stems either from the fact that it directly hedges against inflation or is able to yield attractive returns in times of rising inflation. We summarise the evaluation of the individual asset classes in the accompanying table.
The best inflation hedge is inflation-linked government bonds. The return outlook depends on the extent to which inflation expectations are already priced in and the benchmark inflation index is implemented in the linker (that is, Eurozone-harmonised CPI versus national headline inflation and core rates).
Asset classes that are able to yield attractive returns in the current inflation environment are commodities, hedge funds and real estate. The latter is currently suffering, however, from the ongoing adjustment process in many countries. While stock markets can perform positively in an inflationary environment (assuming central bank credibility), they suffer in the intermediate phase (the tug- of-war between the inflation-dampening effect of declining growth and inflationary effects of ongoing commodity price strength). Infrastructure investments can also offer a partial inflation hedge, depending on the underlying cashflow structure (inflation-linked payments).
The writer is deputy head of investment strategy group, Deutsche Bank Private Wealth Management
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