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How savvy investors beat inflation

Real estate and equities have the best long-run records

BANGKOK: -- With inflation last month touching 6.2 per cent, your money is depreciating by the day as bank deposits can generate a return of just 3 per cent.

In theory, at 6-per-cent inflation, your money will lose as much as 44 per cent of its value if left alone for 10 years.

While inflation is on the rise, don't stash your cash in low-return bank deposits.

Stocks, equity funds and real estate or property funds are noteworthy investment channels for savers to beat inflation.

The Bank of Thailand forecasts inflation this year averaging 4-5 per cent.

The real deposit interest rate has already plunged to negative territory - minus 1.98 per cent, according to central bank data for last month. Bank time deposit rates are only 1.5-3.0 per cent.

"I haven't put most of my money in a bank account since I started my career in the brokerage industry years ago. We'd lose to inflation [by doing that]. Even if banks offer deposit rates higher than inflation, you'd still lose the opportunity to grow your savings," said Chakkris Uthayophas from Sicco Securities.

He keeps a savings account only for automatic payment of credit-card bills and also for salary transfers from his company.

For those worrying that other investments are difficult to cash out of in case of an emergency, Chakkris suggests money market funds, which generally offer a higher return than bank deposits but are just as liquid.

These money market funds mostly invest in short-term debt, including treasury bills, and also put some of their funds in bank accounts. However, as institutional investors, they can get higher deposit interest rates from banks than individuals. That's why money market funds are currently returning from 2.7 per cent to more than 3.0 per cent to investors.

And money market funds can be redeemed any day.

To seek investments that outpace inflation, one needs to trace back several years. Over the past eight years, inflation has averaged 2.24 per cent, while bank deposit rates averaged 1.92 per cent. Over the same period, stocks returned 17.6 per cent, while bonds yielded 5.9 per cent.

Stocks are apparently the most attractive investment over the long term.

"I put most of my pension in equities," says Voravan Tarapoom, managing director of Bualuang Asset Management. But diversification is key for long-term investors. She suggests mixing stocks with real estate and bonds.

Adisak Kammoon, vice president of KGI Securities (Thailand), also says a portfolio spread among deposits, stocks and bonds would be best. To beat inflation, find investment returns of more than 5 per cent, he says.

Those leaning towards lower risk exposure should allocate 70 per cent of their portfolio to bank deposits and the remaining 30 per cent to stocks. For investors with a higher risk appetite, 50 per cent of their cash should be in banks, 25 per cent in bonds and the remaining 25 per cent in stocks.

He recommends blue chips, especially energy and banking stocks like Siam Cement, PTT and Thai Oil. These stocks will provide capital gains of 10 per cent per year on top of dividend yields of 2-5 per cent. Debt instruments mostly pay 3-4 per cent. In total, this formula should help win the battle against inflation, he said.

Sicco Securities' Chakkris also suggests buying real estate, which has always been the investor's guard against inflation. But rental properties can be tricky and a physical and mental hassle to manage.

"I stopped renting out my condo after the tenant left, taking everything, including even the light bulbs!" Bualuang's Voravan said.

Although investing in commodities - whether directly by buying gold jewellery, bullion or coins, or indirectly through derivative-based funds - can hedge against inflation, there is no guarantee of an extended bull run.

Teeraphan Jittalarn, chief investment officer and senior executive vice president of Krung Thai Asset Management, reiterated the need to diversify by introducing a fund that aggregates all the available asset classes into one.

"There is no single theme that will dominate," he said. "Where are the net asset values of the BRIC [brazil, Russia, India and China] funds now?" They are at rock bottom.

--The Nation 2008-05-12