The secret to long-term wealth is stocks, stocks and stocks. Diversifying into bonds, hedge funds and works of art is also a sensible ploy
1. Buy bargain blue chips
If you look at Morgan Stanley International's Far East index, you'll find that it has returned 2,100% in capital gains since its inception in December 1969 — an average of nearly 70% a year. Even Japan, whose economy has been stagnant for a decade, has seen its Morgan Stanley stock index rise 2,166% in the same period. Hong Kong? Up 2,872% over three decades despite its descent into recession this year.
In the U.S., the Dow Jones Industrial Average has soared from around 40 points, when the index was established in 1896, to about 9,700 points last week. Many crises have hit the New York Stock Exchange — the Great Depression of 1929, the bombing of Pearl Harbor in 1941, the Black October crash in 1987, and now, the terrorist attacks on New York and the Pentagon on Sept. 11. Each time the Dow dropped like a stone — only to bounce back to greater heights.
The lesson: Anchor your portfolio in top stocks — known as "blue chips" in many markets — and hang on to them. Accumulate more shares when there's blood in the streets. "Good quality companies are always the first to turn around when the market rebounds," says Peter Reichenbach, managing director of Swiss-based Gottardo Asset Management. "I'd suggest global blue chips. With internationally strong companies, you don't have to worry that they won't be around next year."
U.S. multinationals General Electric and Citigroup are trading at reasonable price-earning ratios — 24 times and 15 times forecast 2002 profits, respectively — compared with their historical valuations. In Asia, consider Hong Kong banking giant HSBC, which consistently tops surveys on companies with good corporate governance. Robert Rountree, chief Asia strategist for Prudential Bache Securities, singles out "big battered names" Samsung Electronics in Korea and chip foundries TSMC and UMC in Taiwan. "They're so grossly oversold," he says.
In addition to direct holdings in blue chips, consider exchange-traded funds. These are listed vehicles that invest in index constituents. The downside: you get exposure to clunkers, such as badly run conglomerates included in an index only because they are too big to ignore. The Tracker Fund of Hong Kong mimics the Hang Seng index, while DIAMONDS and SPIDERS in Singapore replicate the Dow and S&P 500, respectively.
2. Get steady income from cash payers
There's no better proof of a company's strong fundamentals than the evidence of the dividends it pays out year after year. Small-cap companies often grant the highest and most consistent payouts. At HK$3.20 per share, Hung Hing Printing boasts a dividend yield of nearly 9%, while Kingmaker Footwear, at HK$1.40, yields 6.7%. Cycle & Carriage in Malaysia and Cerebos Pacific in Singapore are each forecast to have a dividend yield of better than 7% next year. National Petrochemical, which has yet to be included in the Bangkok index, has an impressive 15% yield. Because they have been sold down, some blue chips now have substantial dividend yields, too. Hang Seng Bank in Hong Kong, Indonesian cigarette maker Gudang Garam and Philippine liquor manufacturer La TondeNa each have a cash return of 6%.
3. Lower your risk with bread-and-butter companies
In good times and bad, people have to eat, use water and electricity, take medicine and travel to work and school. Companies that provide these basic services may be boring, but they are dependable investments. That's assuming they do not stray from their core business. A power utility that has sunk money in Internet ventures, for example, has taken on risk that the investor has to take into account.
Power generators and distributors are the havens of choice in uncertain times. Investors have been bidding up their stock price even before Sept. 11 on fears of a global economic recession. "They've outperformed in the last 18 months," notes Markus Rosgen of ING Barings in Hong Kong. "By the second half of next year, when the global economy is expected to recover, they won't be able to increase very much." He favors oil companies instead. At HK$1.40, PetroChina, Asia's most profitable company, boasts a dividend yield of 10%.
Rosgen also likes oil-dependent firms like Hong Kong airline Cathay Pacific. "These companies are cyclical, so as soon as demand comes back up, they'll rebound quickly." People may have fear of flying now, but air travel is still essential. "We like airlines because they've been so badly battered," says Ajay Kapur, Asia strategist for Morgan Stanley in Hong Kong. "Over a 12-month horizon, the good airlines in Asia will all be substantially higher from these low levels." At S$8.90, consistent moneymaker Singapore Airlines, which recently cut executive pay by 15%, is trading at only seven times last year's earnings.
Companies in food, medicine and household products are also good bets. "Pharmaceuticals are always a stable choice," says Norman Chan, head of research at financial adviser Allen Perkins in Hong Kong. "I like Pfizer, which is one of the most value-driven large-cap drug stocks." The New York-listed stock is not cheap — it's trading at 25 times forecast 2002 earnings — but Pfizer is expected to grow by 20% annually in the next five years.
Mark Monson, head of fund management for Gottardo Asset Management, favors Japan's Takeda Chemicals, which makes medicines, and Kao, the country's biggest maker of detergents. "It's the Japanese Procter & Gamble," he says. Monson praises the two companies for their excellent management, strong brands and dominant market share.
4. Security-oriented firms can be good short-term bets
But don't hold them too long. "Security and defense-oriented companies are definitely a good buy," says Gottardo managing director Reichenbach. "They will benefit from increased spending. But they're probably one-off investments." Warns Rosgen: "People always overexaggerate the potential of safety and security companies when something terrible happens. A few months later, everything is forgotten." Adds Chan: "If the global economy does turn around next year, these stocks could suffer."
Still, the stock of U.S. companies like fighter-plane maker Lockheed Martin and missile specialist Raytheon have soared after Sept. 11. The U.S. Congress recently approved $20 billion in additional defense spending. David Hale, chief global economist and strategist at Zurich Financial Group in Chicago, estimates extra security-related expenditures by the government and businesses in the U.S. at $20 billion to $30 billion a year.
In Asia, Reichenbach points to Japan's Mitsubishi and ST Engineering in Singapore as "good buys at this time." Mitsubishi Heavy Industries is reported to be in talks to manufacture vertical-missile launches as part of U.S. Aegis air defense systems on naval destroyers. Japan plans to buy the ships, but wants them equipped with Japanese parts. ST Engineering is working with Boeing to improve the safety of its commercial planes.
5. Ride enterprises at the forefront of China's still booming economy
Almost everyone is bullish on the mainland, which was finally admitted into the World Trade Organization (WTO) last week. "China is the only growing major area in the world," says Chan. "It shouldn't be affected too much by a global recession, as long as the U.S. doesn't completely collapse." Hale is very upbeat. "The China growth story is driven by the most extraordinary revolution of the last 200 years — the successful transformation of a communist country into a market economy," he says. "China has laid off 45 million people from state enterprises in the past five years. It will soon overtake Britain as the world's second-largest destination of foreign direct investment. Sure, there is the problem of overbuilding and overcapacity in some segments, but overall I'm very bullish on China."
The key is to focus on consumer-oriented companies because exporters are even now getting hit by the global recession. That means retailers, car makers, telecom providers — and even power utilities, because electricity usage in factories and homes will continue surging in an economy that is expanding at 7% or higher every year. But choose carefully. While WTO membership will bring a wave of foreign capital, it will also open the doors to foreign competition.
Look out for bad governance as well. China's regulators are moving to improve corporate transparency and adherence to regulations, but it could take a decade to bring up standards to, say, Hong Kong's or Singapore's. A series of scandals and the regulators' tough response to them have contributed to the decline in locals-only A-shares and in B-shares, which are open to both local and foreign investors. Even then, shares are still overvalued as too much money chases too few stocks. "It's possible for A-shares to fall 40% to 50% in the next few months," warns Hale.
Your best bet is to accumulate shares in mainland companies listed in Hong Kong, Singapore and the U.S. You get exposure to China's hot economy, but get a measure of protection from the more stringent oversight of foreign stock markets. Analyst favorite PetroChina, for example, is listed in Hong Kong and New York. Dominant cellular phone operator China Mobile trades in Hong Kong.
The so-called H-shares and red chips — mainland companies and other firms doing business in China that are listed in Hong Kong — trade at far lower valuations than their peers in China, which have price-earnings ratios of 60 times or higher. "They're very good value," says Reichenbach. "I'd pick companies like Shandong Power and the toll-road companies, such as Zhejiang Expressway, and even China Mobile."
There's ambivalence about the mobile-phone operator because of fears the Chinese government will change pricing policies (both the caller and the person receiving the call currently pay) and will open the telecom market to new players. But China's 1.3-billion population is big enough to support China Mobile, its sole rival China Unicom, and other potential competitors. China Mobile is also looking cheap. "The premium investors pay for its growth prospects is quite minimal relative to where it's been and relative to other [companies] with similar returns on capital investment," says Dio Wong, regional strategist for Merrill Lynch in Hong Kong. China Mobile was trading at HK$26 per share on Nov. 14, down 50% from its 52-week high.
6. Diversify into selected bonds
When the American bond market reopened after the Sept. 11 tragedy, the prices of U.S. Treasury bonds spiked so high that yields plunged by 50 basis points, a massive decline for ultra safe fixed income instruments. "Bonds tend to be overpriced right now," says Reichenbach. "There are few great deals in bonds and cash."
Still, no portfolio should be 100% in stocks, and bonds with reasonable yields are better alternatives to bank deposits — and are nearly as safe. Consider the long-term corporate debt of blue chips like Hong Kong's Hutchison Whampoa. Many long-dated corporate bonds have fallen in price as international investors sold them in favor of U.S. Treasuries. At one point last month, Hutchison's bonds maturing in 2011 traded at 230 points over U.S. Treasuries. Other analyst favorites include bonds issued by oil company Petronas and power utility Tenaga Nasional, both in Malaysia, and Korean oil refiner S.K. Corp.
Fixed income instruments tend to be denominated in the high six figures, so ordinary investors typically buy bond mutual funds to gain exposure to them. Baring GUF High Yield Bond, whose financial strength and quality of management are rated a high "AA" by Standard & Poor's, focuses on global corporate debt, including those of Asian firms. Other well-regarded bond funds include Janus World High Yield and Investec GSF USD High Income.
7. Hedge funds provide safety nets in bad times
Previously available only to millionaires, hedge funds are now within the reach of ordinary investors for as low as $30,000. That's the minimum subscription for AHL Diversified Futures in Hong Kong, which uses sophisticated computer programs to hunt for differences in the prices of futures instruments in different markets. It's up 23% so far this year. "Hedge funds are not hugely exciting, but that's what's good about them," says David Chapman, senior manager of regional financial adviser Towry Law's asset management division. In good times and bad, he says, "they generate steady returns of 10% to 12% a year, and in some cases, 15%." Hedge funds typically take long positions on some securities, shorting others. They won't win big, but they won't lose hugely either.
There are more than 4,000 hedge funds managed by some 1,500 financial houses using various strategies. Managed futures are the flavor of the moment. "In the last two months, they have outperformed all other hedge-fund strategies," says Linda Wong, group deputy director at Allen Perkins. "Many managed futures hedge funds delivered a 20% return." But there's no telling whether the trend will continue. For the conservative investor, a good option is a fund-of-funds such as the Momentum All Weather Fund (minimum: $25,000), which invests in nearly 30 hedge funds that follow different strategies and operate in various markets.
8. Bargain art pieces bring pleasure and capital gains
At an art auction in Hong Kong earlier this month, one mainland Chinese woman elicited titters with her unorthodox bidding. She never put down her paddle as others in the room tried to top offers for Nine Buffalos, an ink drawing by Chinese artist Li Keran. The woman won the bidding for the artwork — for $485,000.
The rise of the cash-rich mainland art collector may be one of the side effects of China's economic boom. "Now is a good time to buy before the mainland Chinese market opens up," says Rose Wong, director for jadeite jewelry at auction house Christie's. She expects jade prices to soar in the next three to five years as Chinese grow wealthier. Because of the prospect of a global recession, many art pieces are priced at bargain levels compared with what owners were asking for 10 years ago. A Ming Dynasty vase that sold for $225,000 in 1998, for example, had a floor price of just $90,000 to $115,000 at a recent auction.
You may want to acquire Chinese pieces now in anticipation of higher prices when mainland collectors hit their stride. Or you may opt for Western works and other antiques to ride renewed interest in art when the global economy gets back on track. Whatever your choice, make sure you buy top-notch works of art that you really like. That Ming vase can sit in your study for five years or more before you see its value appreciate substantially.
9. Time to buy a dream home — to live in
You'd have to look long and hard to find a bullish property analyst these days, especially in Hong Kong. "People here have not yet woken up to the fact that property is no longer an asset class," says Rountree of Prudential Bache. "Property in Hong Kong has seen its better times and we're not going to see the same upside over the next few years." But what's bad for investors can be good news to first-time homeowners. If you're still renting, now may be the time to buy your dream castle.
Mortgages are at all-time lows — and likely to fall further as the U.S. Federal Reserve moves to stimulate the economy. "Your mortgage installments will probably be much lower than your monthly rental right now," says billionaire Robert Ng, chairman of Sino Land, Hong Kong's fourth-largest property group. "I don't see the point of people who say they'd rather keep their money in cash and rent an apartment."
By ASSIF SHAMEEN and MARIA CHENG
http://www.asiaweek.com/
