Best picks for 2003

So you’ve gotten your nice Christmas bonus, and you’re wondering where to invest it? We’ve compiled a few special tips for you.

There exist endless investment opportunities, and nearly no one can state with complete assurance that he knows the best investments. Czech national bonds? American stocks? Japanese corporate bonds? The EU money market? And what about real estate, not to mention art, antiques, or wine? There are many options, but when choosing your investments for the inchoate year of 2003, we will rely on the usual distribution: the money market, stocks and bonds, and, last but not least – the real estate market, which has great prospects.
“The basis of a good investment strategy is the term over which we want to make our investment, and how much funding we have on hand,” points out Henk de Bruijne, the general director of ING Investment Management for the Czech Republic. If you just want to park some money for six months while you’re buying a house, it isn’t worth it to risk putting it anywhere else than in a money market fund. Of course the interest isn’t great, but the fund protects your cash against inflation, and you can use it at any time. Planning larger investment strategies pays only in the event that you won’t need your cash for at least a year, ideally three.
So let’s say you’re planning for the long term. How do you see 2003? “I think this won’t be an exciting year for Czech investors,” de Bruijne says, and adds that this year (i.e., 2003) better results can be expected on the stock market, with bonds doing less well. If we understand a well-balanced portfolio to consist of one third in money market instruments (with lower but stable yields), one third in bonds (somewhat higher yields, but with the danger of fluctuating investment values), and one third in stocks (with potentially high profits but also the risk of sharp losses), it’s simple to make a recommendation for 2003: sell some of your money market funds, and buy bonds and, especially, stocks.

Petr Beneš
Photo: Vladimír Weiss

The money market and bonds – worse than last year

“Because interest rates in the Czech Republic and Europe are at historical lows, you can’t expect any miracles on the money market,” de Bruijne comments. On the other hand, investment on money market funds should never be considered as long-term money-makers, they are simply places for putting emergency cash, money you can take out any time you need it without worrying about share price declines or even total investment loss.
And Czech bonds won’t do as well as in recent years, either. “Nevertheless, unless interest rates rise sharply, bond fund returns will markedly exceed the level of inflation, and that’s reason enough for investing in them,” says Petr Beneš, vice-chairman of První investiční’s board of directors. And what if you’re going for more? “Corporate bonds could be interesting, since sometimes their yields make up for the higher risks that follow from the current volatile situations on local and global markets,” Beneš explains. However, you have to be very careful and painstakingly select which bonds to buy. According to Beneš, this year it will be good to watch euro-denominated bonds issued by large companies, but the main thing is to find a good portfolio manager. “Especially when yields are low and every tenth of a percent counts, it’s important to have a manager who knows how to diversify properly,” Beneš affirms.

Will stockshave a brighter future?

Stocks could be good news for investors. Beneš says that the stock markets have the worst behind them, so better times have to come. “The last three years were horrible for shares,” de Bruijne agrees. However, Czech stocks managed to escape from the general trend last year, finishing in the black. “The American and European economies will grow at a below-average rate, and even though the central European economies should be able to avoid this trend and record much greater growth, you have to be careful,” de Bruijne cautions. He still sees many risks that investors somehow pay insufficient attention to. “Mainly, there’s the possible war in Iraq and a spike in oil prices, ominous developments in Brazil, the slow growth of the advanced economies, and the problems with rising deficits encountered by many EU members,” he explains.

Henk de Bruijne
  Photo: archiv

If an investor decides to put money in stocks, he should stick with the Czech Republic. “Compared with western Europe, the Czech Republic and the rest of central Europe make up a region of high growth,” de Bruijne points out, adding that it’s impossible to anticipate more rapid growth this year in western Europe. “Many firms focus on cutting costs, and lower expenditures by firms and their employees are dampening the growth of European economies,” de Bruijne says admonishingly. Of course in the Czech Republic we face the problem that there are only a very few truly negotiable stocks to invest in. But if you want to invest in other countries, be sure to distribute your investments as much as you can, in order to limit the risks of various problems in single industries or regions.
For those who want to go into stocks, but still don’t have faith in a long-term recovery, we can recommend guaranteed funds. These are based on the assurance that their investors get the invested funds back after a certain period of time (usually four to five years) if the market turns sour, while if the market rises the shareholder receives a greater part of that increase. “It’s the ideal investment, especially at a time when stock markets are expected to rise but certain risks persist,” Beneš notes.
Whatever you decide to invest in, remember not to put all your eggs in one basket – spread your money out as much as you can in order to limit your risks to the greatest possible degree. Don’t believe promises of staggering returns, and pay attention to what the experts say – they can often help you avoid fatal errors.


Real estate – an insider’s tip
WHILE ENRICHING one’s portfolio with real estate is unusual these days, according to Petr Beneš, vice-chairman of První investiční’s board of directors, 2003 will be a good time for such investments. “Although newer apartments and parcels are already quite high, you still enjoy yields on rent of 6-10%, while in the EU the return is only 3-4%,” Beneš stresses, saying that this marked interest differential will force further real estate price increases and greater investment returns with the country’s imminent EU accession.
Also stimulating real estate price growth will be the establishment of real estate funds, which should be allowed by a new law on collective investment, probably effective in 2004. “These funds are designated for people who want to invest in real estate but don’t have a few million on hand to buy buildings or land,” Beneš explains. Just a few hundred thousand crowns will suffice investing in real estate funds, the establishment of which will bring new money into real estate purchases (in other words, further price growth). Real estate investments also have another great advantage – they are relatively transparent, and even a layman can understand them. “Thanks to the internet, it’s very easy to research price levels in any area; one can just check on information at the registry of deeds, so it’s quite easy to get the critical information,” Beneš says. The role played by brokers is currently being limited to only consulting, so overall costs not related to the investment are declining.
Furthermore, Beneš says that it also pays to borrow to buy real estate. A person with above-average income can get a mortgage at 5-6% interest (after accounting for the tax break and possible government subsidies, this figure could be even lower), while rent yields are often twice that..

How to protect yourself against indebtednessThree types of insurance – endowment, risk, and insolvency – represent three different routes to the same goal: protecting your family against poverty or debt in the event of an unexpected catastrophe. Which one should you choose?

Tomáš Skřivánek
Photo: V. Vlk

Endowment insurance is the choice of most financial consultants, allegedly allowing you to provide for your family and, unless something serious happens to you, enjoy asset growth. Endowment insurance is not in fact the best way to increase the value of your savings and providing for your family in the event of illness, injury, or, at worst, death, or possibly as a guarantor for repayment of a mortgage, a leasing plan, or a consumer loan. Classic life insurance is advantageous mainly for brokers, because they receive tens of thousands in commissions for each contract closed.
A main drawback of endowment insurance (not to be confused with investment life insurance) is its inflexibility – for example, should you want to increase the insurance component and decreasing the savings component or vice-versa. Additionally, by buying a combined product you lose the freedom to choose a policy from several insurers. Price-wise, independent risk life insurance and pension insurance will cost you about the same amount. In the event that you replace pension insurance by saving through mutual funds, arranging for comparable security in old age will cost less.
The newest alternative is insolvency insurance. In the event of your collapse, your family won’t get a bundle of money in cash, but the insurer assumes debt installment payments on your behalf. This is an inexpensive but effective form of insurance that protects you against all imaginable risks, including loss of employment. For example, if you borrow CZK 150,000, the monthly premium is about CZK 175. This type of insurance can be closed to cover any loan, the only difference is that some banks offer and mediate this opportunity themselves, while others require that you communicate directly with an insurer.






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