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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
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