Rising inflation poses investment challenge

Published 23 February 2011
The Business Times
By Siow Li Sen

Inflation is blasting a hole in savings as depositors face negative interest rates but there’s nowhere to hide either in an increasingly risky environment.

Rising inflation poses investment challengeA $1 million fixed deposit placed in the bank 12 months ago is today worth $956,685, a $43,315 paper loss caused by the double whammy of historic low interest rates and runaway inflation.

This hole will only get bigger as inflation races to 5-6 per cent in the first half of this year.

Inflation in Singapore surged to a two-year high, rising to 4.6 per cent in December from a year ago, and up from 3.8 per cent in November.

Last week, the government revised the 2011 inflation forecast from 2-3 per cent to 3-4 per cent, adding that inflation is expected to rise further to 5 to 6 per cent in the first few months of this year.

So it’s no wonder that inflation is said to be the biggest concern of the wealthy in Asia, who typically are overweight in cash.

According to the World Wealth Report 2010 issued by Merrill Lynch and Capgemini, Asian high net worth individuals are overweight in cash and real estate, and underweight in fixed income securities, compared to the global average.

Their cash holdings, as a percentage of total wealth, were 29 per cent in 2008 and 22 per cent in 2009 – well above the global average of 17 per cent.

‘Here in Asia and other emerging markets, the double whammy of inflation and low interest rates are indeed some of the most pressing investment challenges,’ said Yee Chin Lit, Clariden Leu, head, South-east Asia.

Singapore, which does not have an explicit interest rate policy, has seen negative real interest rates hit historically low levels, noted Kelvin Tay, chief investment strategist Singapore, UBS Wealth Management Research.

The real rate of interest is -4.42 per cent when one takes the 4.6 per cent inflation rate in December and compares it against the average three-month fixed deposit rate of 0.18 per cent, said Mr Tay.

That means a $1 million fixed deposit at the beginning of 2010 would have a purchasing power of $956,685 today, he said.

Inflation is forcing the rich to consider more risky investments, but risk aversion remains strong. That’s why many have been buying property which in turn drives up prices.

‘In order to generate positive real returns, conservative investors may have been forced to consider more risky financial instruments that they have little experience with, such as the stock market, or turn to the physical property market with mortgage debt at historical lows, to enhance the yields on their investment portfolios,’ said Mr Tay.

With property wired into the Asian DNA, attempts by governments to prick asset bubbles have so far met with limited success.

‘Asian clients – by virtue of being Asian – love property,’ said Boris Collardi, chief executive of Julius Baer. He estimates that property investments on average make up at least 20 per cent of Asian clients’ portfolios.

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