Investing Guide During Global Recession

PRICES of diamonds, luxury yachts and even airliners are dipping this recession and even the super-rich may not be spared.

But this shouldn’t come as a shock, really. After so many years of easy money, people have forgotten about the credit cycles that accompany the boom-bust cycles of stock markets and the business cycle.

Various sizes of Kijang Emas, Malaysia’s own gold bullion coins. Gold acts as a reliable store of value as it fulfils the functions of money.

According to Choong Khuat Hock, 47, director of fund management company Kumpulan Sentiasa Cemerlang, credit cycles of tight money go hand-in-hand with recession when bad debts weaken the capital structure of banks and collateral values diminish. This usually follows periods of easy credit and loose lending standards.
“The financial markets will continue to do badly this year,” he predicts.
Since Malaysia is dependent on trade, it is likely to be affected as 30% of exports are commodities, which have more than halved in prices.
Given the dismal scenario, Choong advises people not to rush out to buy assets.

“Gold is a good investment if you want to diversify but it’d be silly to put all your eggs in one basket. Investing in foreign currency is tempting but it’s still highly speculative – given the global recession, people will still run back to US currency.

“There will surely be a decrease in consumer spending and less spent on luxury items. But healthcare and consumer staples will continue to do well.”

The value of antiques does not depreciate.
Going into other types of investments at this time may seem attractive but you need to be sensitised to major trends. For example, the price of Korean antiques rose sky-high as that Tiger economy grew in the 1980s and 1990s, and there was a demand for Stalinist memorabilia when the Union of Soviet Socialist Republics was dissolved.

During tough times, people will be less likely to pay for expensive luxuries, so it’s quite possible to pick up some “lifestyle investments” at bargain prices. Generally, it’s recommended that any such investments form only a small part (usually no more than 15%) of a balanced portfolio for investors with fairly substantial net worth.

Midas touch

Like our forefathers before us, when the going gets tough, people may start hoarding gold as it’s a good hedge against inflation as stock markets decline.

However, Choong foresees a deflation this year so gold prices may come down. When everyone is going to be strapped for money in the coming downturn, cold hard cash in hand seems better than investing in gold.

Still, gold is a viable option for those who are looking for somewhere to park their money as its fundamentals are strong.

Based on data by the World Gold Council, gold has remained less volatile against most commodities and precious metals in the current credit crunch.

Pu-er tea was one of the hottest investments in 2007.

According to Maybank’s website on Kijang Emas, Malaysia’s own gold bullion coins, gold acts as a reliable “store of value” because it fulfils the functions of money. It is portable, indestructible and cannot be manufactured. Gold is easily recognisable and accepted as a form of payment.

Its value has remained more or less stable and, as an asset, it has a relatively low-to-negative correlation with other asset classes like currencies, bonds and Treasury bills.

Considered the most liquid of global assets, gold doesn’t depend upon any government’s or company’s promise to repay, nor is it directly affected by economic policies.

Prices have undeniably been affected by the current global market, but JP Morgan has raised its price forecast for gold for 2009 on expectations that investors will buy into bullion as a haven from risk.

Gold investments in Malaysia can be made via the purchase of physical gold bullion in the form of gold coins or by opening a gold savings passbook account which allows account holders to invest without worrying about physical storage.

Account holders can withdraw their gold in cash or physical gold form.

Alternatively, investors can make their gold investments via gold exchange-traded funds (ETFs) listed overseas. The gold shares are backed by physical allocated gold bullion and are traded in US dollars.

Land beneath my feet

Old stalwarts will tell you nothing compares to investing in real estate as stock markets may plunge and other types of assets are not as tangible. And if all else fails, you still have a roof over your head.

In Malaysia, construction and building materials have gone up considerably and, although petrol prices have since been reduced, the same cannot be said of the former.

However, the outlook is still positive as Malaysia is often among the countries on the recommended “buy list” of global property advisers. Our financial institutions are relatively conservative in approving loans and we are not overly dependent on foreign banks.

Teh Lip Kim, managing director of SDB Properties, recommends investing in property.

“From an investment point of view, property has been the way many people have made their money. For those looking to buy homes to live in, this may be a good time to invest,” she says.

“Some property developers have announced that they will be postponing launches to a time when markets have improved. In these trying times, some may be marketing homes with more attractive packages. However, it is unlikely that prices will be very much cheaper, as most developers have to bear the increase in building cost.”

Teh feels this could be a good time to look out for property in the secondary market. Those who purchased property for investment and were not able to continue with their commitment, for example, may be willing to sell for less than the market value.

“For buyers who are thinking of renting out to the expatriate market, location is important. Condominiums in prestigious locations such as KLCC in Kuala Lumpur, for example, would be a good bet. I believe this area is still undervalued compared to similarly prestigious locations in other countries in the region,” says Teh.

For investors who wish to rent out to the local market, landed homes are good buys. They may also consider buying commercial properties such as shop offices in more mature areas.

When considering location, take into account the surrounding area. While certain parts of Kuala Lumpur may be popular, these areas may end up being over-built and congested. Develop-ments which offer more greenery are possible options, as such places are relatively few and far in between.

Ensure that the developer of the project is credible before investing.

The developer must be able to complete the development and carry the project through. This is especially so for condominiums or homes in gated and guarded developments, as maintenance issues will be important in the long run.

For the time being, banks are still lending and coming up with competitive and creative loan packages for potential purchasers. The government has also come up with a stimulus plan which includes measures to boost the property sector, including promoting Malaysian properties overseas.

“If you want to invest in property, it should be of good quality, as such developments will be able to give better returns. Rental yield of anything above 6% can be considered.

“In the current market situation, you’ll have to wait until the market picks up again. My advice is: Be prepared to hold on for at least two to three years before you can get good returns for your property,” says Teh.

Banking on grapes

Some people are turning to alcohol these days, not to drink themselves silly (though given the current economic climate, it would be understandable) but as an investment.

In a newspaper report, Sure Holdings Ltd managing director James Pala said that the biggest appeal of wine as an alternative investment class is that it is low risk, offers stable returns and has a low correlation with stocks and bonds. There is no capital gains tax when the wines are sold.

Liv-ex, the world’s biggest fine wine index based in London, estimates the prices of the best vintages have currently increased by 50% since the start of last year, in sharp contrast to the global stock market, where prices had fallen by 15%.

Bordeaux, a province in France, produces most of the world’s quality and investment-grade wines. From the world’s total production, only 1% is categorised as investment-grade wine, out of which 80% comes from Bordeaux.

The top five performing wine brands of Vintage 2000 are Lafite Rothschild, Haut-Brion, Latour, Mouton Rothschild and Margaux. Investment-grade wines like Lafite survived two major recessions in the past and wine brokers predict it will see through the current one as well.

In Malaysia, the market for investment-grade wines has been on the uptrend this year as investors are looking for safer investments to grow their monies, said Pala in the report. He advised clients to go for less risky and relatively short- to medium-term (two to three years) type of investment.

There are two types of people who spend money on wine: The first only wants to invest money and isn’t interested in product. A serious wine enthusiast will put down money every year for his or her cellar. That’s a classic wine investor or wine buyer, he said.

The second type has a better chance of a return. “Where people fall over is when they invest a lot of money in one vintage,” he says.

London is currently the wine hub of the world and the best place to store your investment as it has the best bonded public wine warehouses equipped with high-tech facilities and conducive storage temperature, among others.

Novices should start small and do research by reading up international wine magazines. Visit online wine sites to find out what’s hot, as it’s crucial to know where and when to buy wines and how to weed out the fakes.

And if it doesn’t work out, at worst you could always drink your investment!

Tea party

Instead of watching the storm brew in a teacup, sit back, relax and have a cup of tea. And while you’re at it, buy a few “cakes” of tea for the future.

One of the hottest investments in 2007 was Pu’er tea from the remote south-western province of Yunnan. Malaysians were speculating tea like nobody’s business and prices fluctuated like the share market, jumping to almost 50% of buying price for certain prized “brands”.

Not unlike fine wine, Pu’er tea improves with age and is believed to have medicinal value, especially those over 50 years old. Investors in southern China and Hong Kong have come to realise that with the limited amount of tea grown each year, prices can be manipulated by storing rather than selling it.

“There are two types of Pu’er: raw and ripe. Raw tea is normally left to ferment and mature naturally and this is the best type for ageing. Different aromas are obtained from different aged teas and, for this, people are willing to pay handsome prices,” explains tea merchant Wayne Thong, 28, from Cheer Ascent.

Ripe Pu’er tea is artificially fermented at the factory stage and has a different taste. Not all teas can be aged; green tea is best consumed when fresh, and teas like Ti Kuan Yin depreciates with time.

“In 2007, the tea market hit a peak as there were too many speculative buyers and now it has bottomed out. This can be a good time to invest but only if you can wait as we’re talking long-term gains – 10 to 20 years’ time.”

Ardent tea collectors maintain that Malaysia’s tropical weather is optimum for ageing tea as it is high in humidity but hot, which means the heat evaporates the moisture faster than fungus can grow.

Collectors should store tea in a dry and cool place, and be patient. Ensure that the storehouse is termite-free. Storage cost is low as an unused room or corner in the house will do.

“Malaysian teas (those from China but aged here) have become a brand in itself and is high in demand,” says Thong, adding that Liu Pao tea can also be considered for investment.

Investors must know how to differentiate between good and poor grade teas to avoid being cheated. New investors should start small and buy newer teas (from five to 10 years) to appreciate the minute differences in aroma, before progressing to older teas.

“It’s a niche market and I wouldn’t promote tea as an investment, if you’re not into tea,” he says.

Aged tea can be sold through a personal network of fellow tea drinkers who collect for personal consumption, or re-sold to the tea shop. You can also scout for buyers on e-bay or tea websites.

“Professional warehouses offer storage facilities and some brokers even promise a return of 20%. But there’s a risk of the broker absconding, since there are no regulations governing tea investment here,” explains tea art director Camellia Siow from Purple Cane Tea House.

In some countries like Hong Kong and Taiwan where Pu’er is highly sought after, buyers employ lo shi (rats) to sniff out where and how the best deals can be obtained.

“These middle men (for a commission) match willing buyers and sellers to get the best tea for the right price. Unfortunately, we haven’t reached that level of expertise in Malaysia,” she adds.

Siow says it was fashionable to invest in tea in 2007 but the bubble has burst as the market is over-committed and experienced investors are putting in more money to even out their cost for long-term profit.

Art attack

What’s art to one person may be junk to another, so how do you begin to collect art? But people are jumping onto the bandwagon anyway due to the meteoric rise of art prices.

That’s because fine art has a very low correlation with stocks and a negative correlation to bonds.

Many predicted a dip in the art market during the 1997 Asian financial crisis, yet quality works maintained or appreciated in value even in those times.

In recent years, more middle-class Malaysians have been buying art and, for the well-heeled, it’s part and parcel of the interior decoration.

In a newspaper report, Valentine Willie, gallery director of Valentine Willie Fine Art, observed that a recession presents buying opportunity as one of its positive side effect is the disappearance of art speculators, whose presence in the Asian secondary market is a blight for our nascent industry. The current situation will benefit real art collectors on the lookout for affordable pieces.

A look at the Moses Annual All Art Index (slate.com/id/2144185/) indicates that not all art performs equally. In recent years, old masters haven’t done so well, while American pre-1950 art soared last year.

Last November, Sotheby’s suffered disappointing sales of impressionist and modern art, prompting speculation that the bubble has burst.

Opportunity for growth in art values arises when investors suddenly focus their attention on a hot new sector or name.

Beyond the blue chip masterpieces such as Picasso and Warhol sold at auction houses like Sotheby’s and Christie’s, there’s a rising demand for Chinese and contemporary Indonesian art today.

For those who cannot afford the stratospheric prices, perhaps it’s best to look to Malaysian or Asian art from neighbouring countries like Thailand, Indonesia, Vietnam and the Philippines as the next investment stop.

Newer artists in these countries – like Stefan Duana, Dedy Sufruadi and Yusra Marturnus from Indonesia), and Saiful Razman and Phuan Thai Meng from Malaysia – show potential for growth.

Works by more established artists like Ahmad Zakii Anwar, 53, from Malaysia, the late Pacita Abad from the Philippines and Srihadi Soedarsono, 67, from Indonesia are priced higher but on an upswing; the profits can be attractive.

While art prices are speculative, pricing is an inexact science. A lot depends on demand and supply.

Generally, Malaysian artists are under-valued compared to Indonesian and Filipino artists. For someone who’s starting out, it’s possible to start small, say RM5,000 and invest in an emerging artist. Look out for a new voice, a different perspective or an alternative vision. What’s more important is that the artwork must be something you would hang on your wall!

It pays to read up, visit galleries and exhibitions, and speak to other art collectors before plunging into the art market. Focus on an area or theme. A reputable dealer helps so that you don’t pick up a fake.

Old is gold

Some people may be spring-cleaning their cupboards in the hope of stumbling upon some valuable antique to bail them out of these lean times. But if you’re just starting to collect now, you should be driven by aesthetic rather than investment reasons.

Quality antiques cannot generally be re-sold quickly at a profit but must be held until their value increases sufficiently for a profit to be made. There are also other costs involved such as storage, maintenance and transportation.

But investment in antiques may give substantial rewards in the right circumstances.

Antique dealer Sulega Abdul Rahman of Syarikat Abdul from Malacca says there’s nothing to stop the deep-pocketed from investing in antiques.

“The value of an antique isn’t affected by economic reasons as it doesn’t depreciate. Collectors would have paid a certain sum for their piece and nowadays, if they can’t sell for the expected price, many prefer to wait,” says Sulega, who’s been in the antique business for 25 years.

Obviously, if you’re thinking of unloading your personal collection, this is not a good time. Last March, silver sales at Christie’s and Sotheby’s in Manhattan held its own and reached record high prices, well above expectations.

This year, things may not be so bright. In Malaysia, nyonya pieces are still highly favoured and sought after. Experts suggest that it’s better to specialise in a collection, which will appreciate more, than have a mix of items. This will also limit risks and help you be more adept at spotting growing trends.

Consulting a reputable, well-established and knowledgeable dealer is essential so that you know about quality, market trends and pricing policies. To ascertain the quality of an item, you need to consider its authenticity, condition, rarity, provenance, familiarity, importance and technique.

Buy signed objects and keeping items in their original boxes makes sense as they fetch better prices.

Investing in antiques is a medium- to long-term venture. Like all the other types of investments, the best advice is to be patient