Money Wise: I told you to invest, didn't I?

A strange thing happened to me this week, a gentleman telephoned to thank me for advising him to invest in mutual funds two months ago. We financial advisers are not used to people thanking us. The usual course is that if investors make a profit, they have made a good decision. However, if they have made a loss they have been given poor advice.

To be fair it did not take a brain surgeon to work out that it was a good time to start investing again as markets were depressed by all kinds of political and psychological factors. Therefore, it was purely a question of how long it would be until markets started to rise and after the Iraq situation clarified there was always likely to be a bounce upwards.

Market rises...

In fact every major market has risen over the last quarter. Using the Morgan Stanley Capital Index (MSCI) as a guide, the largest quarterly rise has been seen in Belgium, Germany and Greece with about 16 per cemt or 64 per cent per annum, if the same progression is seen over the year!

North America has seen a quarterly rise of over 12 per cent and Europe in general 11 per cent. The smallest increases have been seen in Japan (unsurprisingly) at less than 2 per cent and more surprisingly Australia at just over 2 per cent.

Going back to my happy client what he was even more pleased about was that he invested into a euro denominated fund and, in dollar terms, he is showing a quarterly rise of more than 20 per cent given the rise in the euro over the period.

Why...?

However, what I find strange is that if you look at the countries above who have done well i.e. Belgium and Germany, the former's economy is in danger of going into recession and Germany are technically in recession.

In fact, most of the "Old Europe" economies, as Bush christened them, are slowing down and in a worse state now than they were 12 months ago when large falls were seen in the stock markets. The U.S. economy is deeply in debt and likely to go more so as the new tax proposals will reduce revenue and mean increased borrowing.

I must be honest judging what markets will do purely on economic fundamentals these days is very difficult but hopefully at some stage they will win through again to make everyones life easier. In the mean time other factors need to be taken account, the most important being investor confidence.

On a personal basis I have seen many more people starting to invest again, having kept there money in bank deposits for the last six months. I believe the biggest reason for this is that they have realised with interest rates so low, and often almost non-existent, on their savings they are actually losing money in real terms.

This is showing through in the investment funds that they are going into, which are often more volatile (higher risk) than they would have selected a year ago.

I believe that providing people keep a regular watch on their investments this is an acceptable risk for a portion of their assets in the short term, but over the longer period the major markets should be the ones used to provide the majority of your retirement funds.

So where are people investing...

Interestingly, not always in Equities.

Many people still have concerns about the market and one of the fastest growing sector is Emerging Market Debt. Some Funds have seen returns of 20 per cent over the last year and therefore more fund management groups are looking to open new funds in the sector.

The theory being that despite regular financial crisises in various countries economies such as the recent one in Argentina, there are good returns to be achieved from country debt and the risk factor is less than corporate debt. Other funds being favoured are in Foreign Exchange Futures and Derivatives.

These are not areas where the average investor has much experience and thus it is imperitive that you take advice before choosing such a fund. However, as you may be aware, I am a great believer in not putting all your eggs in one basket and these types of funds do allow you to diversify from the more usual holdings in property and equities.

Returning to equity based mutual funds, investors are looking at two areas that I mentioned in this column at the beginning of the year, namely China and Eastern Europe.

Despite the SARS problem the Chinese index has risen almost 25 per cent since January. There is good reason for this as the Chinese retail market is booming and there is now more inward foreign investment in the country than in the United States.

Two of these investors, for example, being HSBC and Warren Buffet, the financial guru and entrepreneur, who have made substantial purchases of companies in the country.

To back this up, there was a report in this paper recently that stated that China and South Korea were expected to be the two fastest growing econ-omies in the region.

The problem with both China and South Korea, obviously, is political uncertainty and also the openness of the economy but, providing that you accept this and keep a watchful eye on your investments, both are worth considering.

Eastern European funds have also seen good rises over the year with Russian funds especially doing well. The rise is expected to continue with the entry of some of their number into the European Community.

Well, there you are, a few areas to think about. Unfortunately, I do not believe that the annualised rises I mentioned earlier will be continued but as long as you get more than that 1 per cent interest that you are receiving on your dollar deposits, you will have done well and I will wait for those 'thank you' telephone calls. On the other hand if the funds go down, it was your decision!


The author is Head of Retirement and Relocation, Towry Law International, Dubai.<