Making money produces more money

Friday, May 2, 2008
Only gold and real estate now can bring positive real interest rates to investors. However, securities deserve to be the investment channel for the long term.

Currently, only gold and real estate can bring positive real interest rates to investors, because the profit these investments can bring is higher than the inflation rate (the real profit for gold investment is 8.5% while real estate 0.7%).

Meanwhile, other investment channels are bringing negative profit. Deposits, for example, have the nominal interest rate of 3%; however, the actual interest rate would be minus if considering the high consumer price index (103%: 109.19% = 94.33%), which means depositors are suffering the actual loss of 5.67% (100% - 94.3% = 5.67%).

As for US dollars and securities, both the nominal and actual profits are negative.

The US$ price by the end of March 2008 had decreased by 1.88% over December 2007, which meant the nominal loss of 1.88%. However, as the consumer price increased by 9.19% during that time, the actual loss US$ investors suffered is even bigger, at 10.14% (98.12%: 109.19% = 89.86% or 100% - 89.86% = 10.14%).

How about investments in securities? The VN Index on March 31, 2008 was 516.85 points, and on December 28, 2007 (the last trading session of 2007) was 927.02 points. This means that the VN Index on March 31 was 55.75% of that on December 28, 2007, or the nominal loss of 44.25%. However, if counting the loss due to the higher consumer price, the actual loss would be higher, at 48.94% (55.75%: 109.19% = 51.06% or 100% - 51.06% = 48.94%).

Three scenarios of CPI

If the CPI increase in the last nine months of the year is equal to the average CPI increase in the last nine months of the last 16 years (3.52%), the CPI increase will be over 13% for the whole year of 2008.

If the CPI increase in the last nine months of the year is equal to the average CPI increase in the last nine months of the last three years, 2005, 2006 and 2007 (4.17%), the CPI increase will be over 13.7% for 2008.

If the CPI increase in the last nine months of the year is equal to the average CPI increase in the last nine months of the last four years 2004-2007 (5.46%), the CPI increase will be 15.2%.

The third scenario seems the most likely. Some experts have even forecast higher inflation rates.

Which investment channels, then?

Though deposits have been bringing negative interest, people will still choose this investment channels thanks to its safety. Making deposits to get positive nominal profit and negative actual profit proves to be a better choice than other investment channels, which have both the nominal and actual profit negative.

Gold deserves to be not only the ‘safe shelter’ in the context of high inflation, but an attractive investment channel. The gold price is forecast to see further increases, since domestic prices are close to the world’s price, which is believed will escalate as a result of the US cutting US$ interest rates to deal with its economic recession.

The US dollar, which was once the No 1 choice of many investors, has become less attractive in the eyes of investors as the dollar has been devaluating against other hard foreign currencies like the euro, pound and Japanese yen. It is wiser to invest in non-dollar currencies instead of relying on the US dollar.

Securities have attracted 300,000 investors with 288 listed companies and the total market capitalisation value of VND315tril. As the VN Index has been falling since the beginning of the year, securities investors have turned their backs on the bourse.

However, some analysts have forecast that the VN Index will rebound to hit the 600 point threshold by the end of this year, an increase of 15%. And if the forecast becomes true, securities investments will bring more profit than deposits.

The real estate market witnessed three fevers (the first one occurred in 1993-1994, the second in 2001-2002 and the third in late 2007, early 2008) before falling now. The tightened monetary policy and the overly high construction material prices both have made real estate prices increase and real estate demand decrease.

However, analysts believe that in the long term, real estate will still be the right investment channel to inject money in. The rapid urbanisation, the policies on allowing Viet Kieu and foreigners to buy homes in Vietnam will make real estate prices increase further. However, the profit from real estate investments will not be high due to the policies on limiting construction areas and tax policies (tentative progressive tax, which aims to limit speculation, and personal income tax). (TBKTSG)