Friday, February 03, 2012

The search for yield

In an environment where interest rates for deposits and HKD bonds remain very low, are negative in real terms and are expected to remain low for some time, the quest for decent and reasonably secure yields is driving a lot of my investment decisions. To illustrate the effect of inflation, if deposits are earning 0.255% (what HSBC is currently offering) and inflation is running at 4% (an arbitrary figure), then after five years a HK$1.00 deposit will have earned about 1.3 cents thus increasing to HK$1.013 while the real value of that deposit will be around 83.2 cents. Against the background of a 50 year time frame, inflation will kill the real value of cash and other fixed income.

At the moment I have more cash than I wish to hold - at the end of January I held cash equivalent to 56.7 months of household expenses (excluding mortgage payments). Given that I am a net saver (as is mrs traineeinvestor) and dividends and interest will continue to accrue, absent any new investments the cash balance will continue to grow through to retirement (which is now scheduled for early 2013).

In terms of choices:

1. dividend paying shares are the obvious option. Even after the recent rally, there are still plenty of good companies offering earnings multiples or NAV discounts which are below long term averages and (sometimes) reasonable dividend yields

2. overseas bonds: AUD, NZD and USD bonds offer better yields than anything HKD denominated and good quality credit risks are available. For RMB, while better yields are available they generally require large minimum investments and a substantially reduced credit quality

3. real estate does not really stack up at the moment: the yields are inadequate and the HKSAR government is currently implementing a plan to push real estate prices down. If prices fall far enough, I will consider buying later in the year

4. derivatives: while derivatives have their place, generally what the banks will offer to the retail customers are not worth having

Right now, equities look the best long as I can live with the volatility.

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