Colin Tan
Colin Tan is head, Research and Consultancy, at Chesterton Suntec International.
How would you hedge against inflation?
Two stories caught my attention over the past week. The first was an announcement in Geneva by Switzerland’s Palaedino Group and Euroasia Investment. They unveiled plans to store and manage gold in Singapore for ultra-wealthy clients who have lost confidence in banks and paper money. The gold will be stored in the high-security Singapore FreePort facility.
Palaedino president Leonardo Castellana said worries about inflation, stoked by expansionary monetary and fiscal policies, had spread mistrust of paper currency. He added that the 2008 financial crisis sparked demand for super-secure assets held outside the banking system.
The second was an online poll conducted across 11 markets in the Asia-Pacific region — including Singapore, Australia, China, Hong Kong and India. It showed that Singapore residents are the most concerned with putting enough aside for retirement.
The two stories reminded me of what a businessman once told me: It is harder to preserve wealth than make money. This was certainly true of Singapore over the past 12 to 18 months. The stock market has rebounded spectacularly from its lows — by more than double. The property market has also recovered strongly and anyone who has bought and sold in the run-up would be sitting pretty on hoards of cash. While it was certainly easy to make the money, they are now finding it hard to put the money to better use.
Talking about the real estate market with many investors over this period, it dawned on me that we are seeing the emergence of a new breed of property buyers. Unlike your traditional owner-occupier or investor buyer who focuses on yields and capital gains, the top priority of this group of buyers is wealth preservation.
They know that a correction in property prices will take place sooner or later as the market is cyclical in nature and that the more bullish the run-up is, the deeper will be the decline. What they want in an asset is something that will allow them to ride through the crisis, notwithstanding the inevitable losses.
So we will see people continuing to buy gold and other commodities even though they may be over-bought.
Likewise for property. This group of buyers do not respond to the market in the traditional sense. Short-term oversupply is not a problem so long as they can hold on to their property through the troubled times and come out better than others.
Low rental yields? Not a problem but if they can be avoided, why not? Such buyers may be willing to pay a premium for projects with longer periods to TOP. Some wonder why two new projects of similar quality and location with different completion dates command different premiums. Now you know.
Punitive sellers’ stamp duties? Not a problem. The predicament of this new group of buyers is not about making money — they have made enough — but preserving wealth. If I am correct, the emergence of this type of buyers has policy implications. It means the traditional tools will no longer be as effective as before.
It is interesting to note that among the many measures the Chinese government has introduced to combat inflation and cool the property market is the raising of long-term interest rates for deposits by more than those for lending. The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property.
Towards the end of last month, after the introduction of our fourth set of cooling measures, the Monetary Authority of Singapore dished out advice to other countries. It said policy-makers in the region must communicate clearly their resolve and the willingness to take progressively tougher measures where warranted as property bubbles can build up quickly. More importantly, for these tools to be effective, the intention of the authorities has to be clearly communicated.
So it came as a surprise when we were later told that the measures implemented here would not be permanent and that once they are no longer necessary, they will be removed.
I can understand that statement but just because the majority of property analysts expect the market to correct, it does not mean that it will. If that were the case, it would be so much easier to co-ordinate a price correction. Only a short time ago, many who specialise in the HDB resale market said that prices would correct soon. That was in September. Has it or is it still too soon?
A recent business commentary highlighted the herd instinct of stock analysts in giving the same recommendation. It is always difficult to defend a contrarian view because when you are wrong you pay dearly for it.
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This article was first published by the Malaysian Insider on 11 FEB 2011.
