A New Investment Paradigm

Published in the Bangkok Post, January 25, 2008

Richard Colburn

Many expatriates who choose to manage their own savings and investments have traditionally allocated their money into cash and property.

The global financial events of last year mean that assumptions like ‘money in the bank’ and ‘safe as houses’ have been rigorously tested and found somewhat wanting.

Safe as houses

Property has the advantage of being a real investment, while stocks/shares can and do ‘go to zero’. General Motors was recently given a price target of just that! In the UK, Woolworths has gone into liquidation.

Many who have invested directly in real estate are now faced with an illiquid market. This is due partly to the unavailability of credit as well as the fact that real estate prices may not yet have reached their clearing levels.

However none of this should come as any real surprise.

In December 2005, ‘The Economist’ published an extensive report on the global residential real estate market, which it said was already ‘the greatest financial bubble of all time’. Three years ago it was already bigger than the bubble that precipitated both the Wall Street Crash, as well as the dot.com crash that greeted the new millennium but despite this, prices kept on rising.

Markets and fundamentals don’t always move in tandem or even in the same direction and it wasn’t until the summer of 2007, with the collapse of the UK’s Northern Rock bank,  that there was any serious acknowledgement that house prices might NOT actually carry on going up forever.

Money in the bank

Many expats hold significant portions of their net worth in the form of cash, in bank accounts.  During 2008 the security of this strategy was called into question.

Banks have collapsed or have averted collapse only with Government bail-outs and guarantees and in some cases nationalization. In the United States, nationalization goes by the somewhat softer name of conservatorship which has been the fate of both Freddie Mac and Fannie Mae.

Printing money out of thin air to bail out failed banks erodes the purchasing power of those currencies.

Exchange rate movements during 2008 mean that the real cost of living for some expats in Thailand has risen sharply.

During 2008, British and Australian expats have seen the value of their home currencies fall by over 10% against the Thai Baht and this is before factoring in price increases inside Thailand.

If this wasn’t enough, interest rates have been slashed by Central Banks. The latest rate cut by the US Federal Reserve has taken the interbank rate almost to 0%.

Even those expats in Thailand who could have lived comfortably on interest from their savings accounts a year ago are now looking for alternatives.

A new paradigm

It is possible that we may now be at, or close to, the end of the credit and consumption driven, boom and bust era of the last 35 years or so.

In his Inauguration address, President Obama seemed to suggest that whilst greed and dishonesty were responsible in part for the current global financial crisis, the main cause was failed (Government) policies and the lack of oversight and supervision.

For the moment, battered economies are being kept on life support by printing money and with token interest rates. These two policies are not free market policies and until global financial markets are allowed to operate freely we will continue to see weekly if not daily spasmodic movements in global stock market indices and the crisis will continue.

Cause and effect

With property and cash no longer the sacred cows that they once were, people are now looking for answers to questions that few have asked since the 1930’s.

But although it may appear to some people that everything has changed, things may not be as different as they seem at first glance, particularly when market prices bear little or no relation to fundamental values.

That said, at current market prices there are probably already some sectors whose fundamentals present very good long term if not medium term value.

The guarantee limits that apply to bank accounts are also common knowledge.

Furthermore, a contraction in the global economy is as inevitable as the expansion which precedes it.

Financial planning

Whatever your personal financial circumstances, it would seem that for the moment at least, cash and property are no longer the default, go-it-alone and safe investments that they once were.

But financial planning is much more than just investment management. The asset protection, estate planning, succession planning and perhaps the tax planning needs of investors also need to be considered, regardless of the economic climate.

Richard Colburn Dip PFS is a UK qualified financial adviser and Managing Director of Sterling Assets the specialist wealth management consultancy serving the expatriate community in the Far East.

Questions to the author can be directed by:email


Published in: on December 17, 2008 at 4:43 pm  Leave a Comment