Benjamin Franklin once said that investment in knowledge pays the best interest. With interest rates persisting at record low levels, making the right decision on how and where to invest your money is harder than ever.
The investor has to weigh up numerous factors, ranging from their risk appetite to the liquidity they might want. However, the wise man would take the time to check out various options to find one that comes closest to what he or she wants – and needs.
The president of ifs-Malta, Simon Grech, said it was only logical to want to maximise the return on investment, even more so in the prevailing low interest rate environment which at times see returns not even covering inflation.
“However, the fundamental principle that the return on your investment is proportional to the risk one takes cannot be forgotten. Yes, there are possibilities for higher return, but these come with a higher risk of losing your investment or part thereof. Unfortunately, a lot of investors tend to forget the latter. Furthermore, investment decisions should be taken in accordance with one’s profile and tolerance to risk,” he said.
One thing is sure: capital markets have become more buoyant in recent years, with admissions to listings to the Malta Stock Exchange main market, through Initial Public Offerings reaching a very significant 14 corporate bonds and 14 government bonds during 2014.
These instruments tapped the market to the tune of some €300 million in the case of the corporate bonds, and €650 million in the case of government bonds. IPOs were consistently oversubscribed. This, combined with the fact that the majority of applicants are retail investors, confirms that the appetite for new investment opportunities to come on to the capital market is very high.
Cliff Pace, the business development manager at the Malta Stock Exchange, noted that the investing public soak up government bond issues in surprising quantities.
“The recent issue of €120 million worth of government bonds attracted over 11,000 applications, which collectively added up to €440 million. That is an incredible statistic that speaks volumes for the credibility and confidence in government paper, in spite of what could be described as relatively low coupon rates.
“There is also significant appetite for corporate bonds, which tend to be shorter term, but which obviously carry a higher risk premium than government paper, and therefore offer a higher coupon rate. The prevalent low market interest rates, together with the fact that corporate bonds are normally issued without any tangible security, unlike traditional bank lending, have clearly translated into a number of organisations seeking financing through the capital markets and investors are clearly keen to invest in this type of financial instrument, as well as the more traditional bank deposits,” he explained.
This year, there should be a good number of bonds coming on to the market, partly as a result of rollover of existing bonds, and partly as a result of new issues and issuers. The problem is that listed instruments are mostly owned by the retail investor, who tend to have a ‘buy to hold’ culture, and therefore investors seeking to buy instruments on the secondary market generally need to pay a premium to entice sellers to the market, Mr Pace added.
“The fact that there is no capital gains tax paid on the sale of listed securities makes this a very attractive market for investors, who can be fairly certain of finding a buyer on the secondary market in the event that they wish to liquidate their investment for one reason or another.”
Of course, with this much demand, the problem becomes supply. The MSE’s challenge is to get more companies to list and in order to fulfil its role as the capital market operator in Malta, the Exchange is currently working on a new product which, once it receives the approval of the regulatory authorities, will target SMEs as potential issuers for either equity or bonds, in a market that will be regulated by the Exchange.
“The movement of capital from savers and investors to businesses and corporate entities – who at the end of the day are the drivers of the economy, through traditional bank finance or the capital market – is critical for the continued development of the economy. Capital investment generates stability and growth in the business community, and therefore increases the level of turnover and employment opportunities in the market,” Mr Pace said.
The dilemma facing investors is whether they should tie up their capital for longer periods to get the best available interest rates, or go for shorter term investments in the hope that rates will improve, allowing them to move their money to the higher yields.
Elaine Bonello, a director at Financial Planning Services Ltd, is sceptical as she sees little to gain from short-term investments.
“Bank rates are negligible – even if you tie up funds for five years, which is far from ideal at the moment. Yields on short-term bonds are equally unexciting: the yield on a five-year MGS is around 0.8 per cent. And on international bond markets we are now seeing the phenomenon of negative interest rates. According to figures by JP Morgan there is more than $2 trillion in negative yielding government bonds with a maturity of more than one year. So especially for pensioners looking to supplement their income, the short term still does not offer any solutions,” she said.
To compound matters, many issuers – both government and corporate – are taking advantage of historic low rates and issuing extremely long-dated bonds. For example just this week, the UK reopened a 53-year bond due for repayment in the summer of 2068.
“And since as they say ‘tutto il mondo e paese’, because of strong investor demand, the government was able to borrow at a record low rate of 2.62 per cent,” she pointed out.
Capital investment generates stability and growth in the business community, and therefore increases the level of turnover and employment opportunities in the market
“There is undoubtedly a lot of liquidity and the Maltese investor loves his coupon. This was amply proved by the incredible oversubscription of last month’s MGS issue, where government received applications amounting to €443 milllion for a €180 million issue.
“Given a choice, the Maltese investor is always keener to invest in bonds and naturally, issuers are well aware of this. In fact, based on the constant oversubscription we see for all bond issues, there is not enough supply to meet the exceptionally strong demand.”
With so many people chasing so few investment opportunities, there may be the temptation to leap at every opportunity, but Mr Grech of ifs-Malta warns that investors should do their homework before taking the plunge.
“Making the right decision at the outset is important, as to reverse it later on can prove to be very costly. This also calls for ethical behaviour on the part of the investment provider.
“While I am sure the majority act in a responsible and ethical manner, unfortunately, instances of misselling tend to tarnish the industry’s reputation and this then results in more rules and regulations. The investor is truly protected when taking an informed decision and education of providers and customers is what we should all therefore strive to achieve,” he said.
Property remains a favourite with locals, especially with demand for rental making it a good option for those who want a regular return on their investment. As with capital market investments, however, knowledge can make the difference between a good and bad decision.
Reuben Sciberras, general manager of Belair Property, said that developments in the rental market make buy-to-let a very viable proposition for those seeking a sound investment with a good return.
“However, when looking at this investment, you need to verify with your estate agent that the property is being bought at a price which would give an annual return of around five per cent when rented out. A sound knowledge of the rental market is crucial for anyone to take an informed decision, and it should be based on a conservative estimate of what the rental value of the property really is,” Mr Sciberras said.
“When considering a buy-to-let investment, you also have to take into account that the property being bought will most certainly appreciate, hence ending up with an asset which is more valuable over a period of time, and which, if well taken care of, could bring a higher value should you decide to sell.
“Another important consideration is that the tax arrangements are similar to other financial products on the market, should you decide to adopt the recently introduced flat 15 per cent tax on income derived from the rental.
“Last but not least, with a minimal cost in getting a property manager on board, investing in a buy-to-let could turn out to be hassle-free, as they take care of all the requirements from beginning to end, leaving the investor to enjoy the results without having to deal with tenants, administration and financial matters,” he said.
The return from rental of five to six per cent is not the only advantage – even though it is considerably higher than even fixed term deposits, which offer on average three per cent for a five-year term. Patrick Xuereb, the regional manager for Frank Salt Real Estate in St Pauls’ Bay and Mellieħa, said that rentals also give an immediate and regular effect.
“You get a ‘pay cheque’ at the end of the month… You cannot say the same thing about a financial investment, where you normally have to leave the investment for a good number of years to see a proper return.
“There is also greater security and a sense of capital guarantee which very few – if any – financial investments offer. Property in Malta is always an asset,” Mr Xuereb said.
Capital appreciation on property could also be from three to seven per cent per annum, depending on the type of property and the location.
Whichever option investors go for, perhaps it would be wise to end with another quote from Founding Father Benjamin Franklin: “Wealth is not his that has it, but his that enjoys it.”