Dennise Williams, Staff ReporterFOR MANY investors, cash is king. They do not want to hear about the stock market and think the real estate market is overvalued. For these persons, the money or fixed-income market is the safest vehicle to invest.
But, it is not as simple as it would seem.
Analyst Karen Fitz Ritson, cautions, "For the investor who has the preference of investing in money market/fixed income investments (because of the relative security of the investment), there are several factors they
need to ask themselves. Are they investing to amass cash to preserve their investments, or is it a vehicle to attain capital gain?"
It is important to decide because there is great risk in doing nothing. One of the greatest risks investors face is the threat of inflation and taxation, which can erode one's purchasing power.
IMPACT OF INFLATION
The vice-president for mutual funds at First Global Financial Services (FGFS), Oliver Chen, explains the impact of inflation.
"The Jamaican investors and pensioners know too well the devastating effect of inflation. For pensioners who retired several years ago, they will realise that their pension income, in real terms, has been eroded."
Mr. Chen said, "In the past, our inflation was largely driven from currency devaluation and, as a result, there was a tendency for investors to run for cover by investing in alternative currencies to the Jamaican dollar. This time around, the inflation hike has more to do with external factors of which oil price has been the major contributor."
However, in the 2005 scenario, inflation has been coupled by
a low interest rate regime. According to Mr. Chen, in the past, "Larger savers, fixed income, to some extent, offered some protection, as there was a tendency for our interest rate on Jamaican dollar investments to be a premium over inflation."
That is no longer the case. Inflation, from August 2004 to August 2005, is running around 18 per cent, while interest rates on money market instruments are about 13 per cent on the high end. In fact, there are commercial banks savings accounts that are paying one per cent.
That said, president and chief operating officer of Pan Caribbean Financial Services, Donovan Perkins, suggests a dose of reality is in order. "Investors need to get used to lower interest rates." While we all may miss the halcyon days of collecting 30 per cent interest on our money, Mr. Perkins, says, "The country cannot afford that!"
INTEREST RATES AND DEBT
Indeed, it has been noted by the Bank of Jamaica that for every one per cent increase of interest rates, the country must pay an additional $5 billion in debt servicing.
So, what should fixed income investors do?
Mr. Chen says simply, "Our situation in Jamaica is unfolding and your guess in terms of what will happen is as good as mine. Only time will tell and, therefore, my best advice is to stay liquid and look out for the opportunities."
And, there are a few opportunities in the fixed income market.
Mr. Perkins suggests that investors consider the tax-free long-term savings accounts (LSA). "These five-year accounts can be had in mutual fund/unit trust-type instruments, or you can open an account designated as a LSA. With interest rates on these in the region of 13-15 per cent, tax-free, an investor would double their money in five years as long as they don't withdraw any of the interest earned."
FIXED INCOME MARKET
Also, one could consider looking at the foreign exchange fixed income market. However, this should be approached with caution, as Mr. Perkins said, "The BoJ has shown resolve to hold the currency." Which means that speculators could get burned trying to buy up United States dollars.
Still, for those already holding hard currency, especially significant sums, there are options.
Ian Kelly, general manager of RBTT Securities said, "In the U.S. dollar money market, there are attractive returns in Government of Jamaica bonds, but some are taxable. Also, with the develop-ment of structured investments, there are other opportunities. There is a credit-linked note that has a yield of eight to nine per cent and is not taxable. However, the tenures tend to be long, around three to seven years, and they are not liquid. Additionally, the entry requirements are for the more sophisticated investor."
CREATIVE INSTRUMENTS
Ms. Fitz Ritson adds, "Several organisations offer very creative instruments, guaranteeing rates up front (in financial terms, a forward contract), commercial paper, or US$ denominated money market funds. You simply have to determine your time horizon and the risk you are willing to take in order to meet your objectives."
Of course, once liquidity has been established, your money needs to grow.
Mr. Chen says, "It has been proven over and over that investments in the right mix of equities and real estate have performed better than investments in safe fixed-income security. This period is probably the best time to consider investing in this market, as the price is low and you could argue 'can only grow higher'."
And, Mr. Perkins adds, "Most people have the opportunity to create wealth. Either you win the lottery or you start early and have a consistent savings and investment plan."
