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02-12-2012, 11:31 AM
This was in today's Sunday Times, Invest section. The most interesting part of the whole article is actually the table (attached below as a pdf) that was in the article.
Don't let inflation take you by surprise
Most people worry about the impact of inflation on rising daily expenses, as they try to keep their personal finances in check.
So it was a pleasant surprise when inflation for October came in lower than expected, at 4 per cent, according to the Department of Statistics last month.
However, it would be wrong to think that the inflation dragon has been slain.
Economists have warned that price pressures remain elevated, and the Monetary Authority of Singapore is forecasting that overall inflation will come in slightly above 4.5 per cent this year.
Next year, it is expected to range between 3.5 per cent and 4.5 per cent.
So somewhat elevated inflation is here for a spell yet.
And there is a broader impact of inflation that many tend to overlook beyond our everyday expenses - the quiet but relentless erosion of savings and investments.
According to a survey released last week by financial advisory firm Friends Provident International, few Singaporeans could accurately point out the effect of inflation on their savings.
More than one-third of respondents understated the impact of inflation over the past decade.
If you had $10 in 2002 and if you kept it under your bed, it would be worth, in real terms, $8.17 today.
Similarly, even if you put your money in a savings account with a bank, inflation outstripped bank interest rates by a fair bit.
The average inflation rate in Singapore from 2002 to last year was 2.1 per cent, while the average interest rate return in interest-bearing accounts was 0.25 per cent a year.
The real rate of return, after factoring in inflation, is minus 1.85 per cent - so it's not a return at all but a loss.
Mr Saktiandi Supaat, head of forex research at Maybank Singapore, said: "Generally, savvy investors would tend to factor in real investment returns or inflation-adjusted returns as part of their portfolio analysis. But most investors tend to see things on a nominal basis (without adjusting for inflation).
"Such a perception would be okay if inflation remains low but in a worst-case scenario of rapidly rising inflation, the required normal returns would need to be high."
In the past decade, the best hedge against inflation has been gold.
Gold prices have risen from US$318 per ounce to more than US$1,700 today. This would mean a nominal return of more than 400 per cent. Even after taking into account inflation, there is still plenty left to go around.
But that does not mean you should put all your eggs in one basket. Mr Paul Arrowsmith, head of retail banking and wealth management at HSBC Singapore, noted that no single asset class is a consistent performer over time.
Bonds
According to research by Mr Steve Brice, chief investment strategist, group wealth management at Standard Chartered Bank, global bonds had an annualised return of 6.46 per cent in the past decade.
Asian bonds have outperformed their global peers with an annualised return of 8 per cent, said Mr Vasu Menon, vice-president of wealth management at OCBC Bank. "This is not surprising as Asia has emerged as a much stronger region after the 1997 financial crisis, and today it enjoys superior fundamentals and growth prospects compared with many other regions."
Commodities
In general, commodities had a 181 per cent return over 10 years, said Mr Hartmut Issel, head of chief investment office, Asia-Pacific research, at UBS Wealth Management.
Among commodities, copper's performance was similar to gold's, but aluminium had a return of about 48 per cent over 10 years.
However, Mr Menon warned that the commodity sector is highly volatile, and suitable only for those with a strong risk appetite. "Investors should ideally limit their exposure to commodities to nothing more than 10 per cent of their portfolio."
Equities
In the past 10 years, global equities had a nominal return of more than 60 per cent, but it is Asian equities that have caught the experts' eye when it comes to investing in the next decade.
On a medium- to long-term perspective, HSBC's Mr Arrowsmith calls for a positive bias towards equities, especially Asian equities, given that the leading indicators for the manufacturing sector in most Asian economies point to a more stable near-term growth momentum.
He added that inflation is moderating in most economies, giving some scope for central banks to ease monetary policy to support growth.
"Current valuations for Asian equities are undemanding and Asian corporate balance sheets are healthy. Over the longer term, the challenge would be for Asian economies to shift to more domestically driven sources of growth with less emphasis on net demand from the developed world," said Mr Arrowsmith.
Mr Brice said: "The risk to equities is a relapse into recession on the back of excessive deleveraging. The immediate focus is on the fiscal cliff in the United States. Debt levels in the Western world remain high, and a gradual deleveraging process is critical to maintaining growth."
Gold
Gold takes the lead for a stunning 409 per cent investment return, in US dollar terms, over the past decade, said Mr Issel.
He added: "It is interesting to note that there was not a single down year in that period."
StanChart's Mr Brice said there are good reasons to retain gold within the portfolio to hedge against further currency debasement as central banks counter deflationary forces with money printing.
songyuan@sph.com.sg
Don't let inflation take you by surprise
Most people worry about the impact of inflation on rising daily expenses, as they try to keep their personal finances in check.
So it was a pleasant surprise when inflation for October came in lower than expected, at 4 per cent, according to the Department of Statistics last month.
However, it would be wrong to think that the inflation dragon has been slain.
Economists have warned that price pressures remain elevated, and the Monetary Authority of Singapore is forecasting that overall inflation will come in slightly above 4.5 per cent this year.
Next year, it is expected to range between 3.5 per cent and 4.5 per cent.
So somewhat elevated inflation is here for a spell yet.
And there is a broader impact of inflation that many tend to overlook beyond our everyday expenses - the quiet but relentless erosion of savings and investments.
According to a survey released last week by financial advisory firm Friends Provident International, few Singaporeans could accurately point out the effect of inflation on their savings.
More than one-third of respondents understated the impact of inflation over the past decade.
If you had $10 in 2002 and if you kept it under your bed, it would be worth, in real terms, $8.17 today.
Similarly, even if you put your money in a savings account with a bank, inflation outstripped bank interest rates by a fair bit.
The average inflation rate in Singapore from 2002 to last year was 2.1 per cent, while the average interest rate return in interest-bearing accounts was 0.25 per cent a year.
The real rate of return, after factoring in inflation, is minus 1.85 per cent - so it's not a return at all but a loss.
Mr Saktiandi Supaat, head of forex research at Maybank Singapore, said: "Generally, savvy investors would tend to factor in real investment returns or inflation-adjusted returns as part of their portfolio analysis. But most investors tend to see things on a nominal basis (without adjusting for inflation).
"Such a perception would be okay if inflation remains low but in a worst-case scenario of rapidly rising inflation, the required normal returns would need to be high."
In the past decade, the best hedge against inflation has been gold.
Gold prices have risen from US$318 per ounce to more than US$1,700 today. This would mean a nominal return of more than 400 per cent. Even after taking into account inflation, there is still plenty left to go around.
But that does not mean you should put all your eggs in one basket. Mr Paul Arrowsmith, head of retail banking and wealth management at HSBC Singapore, noted that no single asset class is a consistent performer over time.
Bonds
According to research by Mr Steve Brice, chief investment strategist, group wealth management at Standard Chartered Bank, global bonds had an annualised return of 6.46 per cent in the past decade.
Asian bonds have outperformed their global peers with an annualised return of 8 per cent, said Mr Vasu Menon, vice-president of wealth management at OCBC Bank. "This is not surprising as Asia has emerged as a much stronger region after the 1997 financial crisis, and today it enjoys superior fundamentals and growth prospects compared with many other regions."
Commodities
In general, commodities had a 181 per cent return over 10 years, said Mr Hartmut Issel, head of chief investment office, Asia-Pacific research, at UBS Wealth Management.
Among commodities, copper's performance was similar to gold's, but aluminium had a return of about 48 per cent over 10 years.
However, Mr Menon warned that the commodity sector is highly volatile, and suitable only for those with a strong risk appetite. "Investors should ideally limit their exposure to commodities to nothing more than 10 per cent of their portfolio."
Equities
In the past 10 years, global equities had a nominal return of more than 60 per cent, but it is Asian equities that have caught the experts' eye when it comes to investing in the next decade.
On a medium- to long-term perspective, HSBC's Mr Arrowsmith calls for a positive bias towards equities, especially Asian equities, given that the leading indicators for the manufacturing sector in most Asian economies point to a more stable near-term growth momentum.
He added that inflation is moderating in most economies, giving some scope for central banks to ease monetary policy to support growth.
"Current valuations for Asian equities are undemanding and Asian corporate balance sheets are healthy. Over the longer term, the challenge would be for Asian economies to shift to more domestically driven sources of growth with less emphasis on net demand from the developed world," said Mr Arrowsmith.
Mr Brice said: "The risk to equities is a relapse into recession on the back of excessive deleveraging. The immediate focus is on the fiscal cliff in the United States. Debt levels in the Western world remain high, and a gradual deleveraging process is critical to maintaining growth."
Gold
Gold takes the lead for a stunning 409 per cent investment return, in US dollar terms, over the past decade, said Mr Issel.
He added: "It is interesting to note that there was not a single down year in that period."
StanChart's Mr Brice said there are good reasons to retain gold within the portfolio to hedge against further currency debasement as central banks counter deflationary forces with money printing.
songyuan@sph.com.sg
