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Efficient investing at a macro level

Many investors seem to believe that lots of money may be made through excessive risk. The resultant stock universe to the Maltese is often a medley of small caps, penny shares, share that are underperforming and obscure firms fished from shady emails or internet sites.

The above is obviously an exaggeration; the typical Maltese investor does not invest in shares at all, period! However, now that the banks in practice refuse deposits (through ultra-low interest rates), and bonds are starting to show their teeth (the Malta 3% 2040 lost 8.6% since October, and that is probably the beginning) the typical Maltese investor is at a crossroads.

While the investment argument is commonly portrayed at micro level, the individual investor makes money or losses money; I am also concerned about the macro implications. Simply put, if the majority of Maltese are bond holders, and especially, if the bonds they hold are skewed to the long-term, a consistent bear market in bonds would result in a massive destruction of wealth in Malta.

Immediately I will respond to the typical comment on the above statement, i.e. investors will only get hurt if they sell the bonds early; holders to maturity should be indifferent. First, I do not believe that individual investors would be happy to have their savings tied up for possibly years with low single digit returns.

Second, and more importantly, the impact on the economy of a significant portion of savings tied down for years would be equivalent to the inverse of quantitative easing. The local economy will be subject to a negative wealth effect and/or pseudo monetary tightening.

I feel that the balance between gauging our success, and what we do with that success has often been ignored. It is of primary importance that earnings and savings are allocated efficiently in order to maximise future growth. This is especially true for a small island with limited natural resources.

It is not enough to generate economic growth (which we are doing extremely well), because one day when we will have used up all our land, caught all our fish and built all our fields, our wellbeing will depend on how each one of us will have invested their hard-earned cash. To my knowledge, the aggregate performance of our investment portfolios is not being monitored.

If, as expected, interest rates continue to increase, many investors will be surprised by the declines in their fixed income portfolios. Property investors needs also be careful, higher interest rates means less loans, but this could possibly be balanced-out through higher economic growth. I repeat… possibly.

The typical Maltese investor has to evolve. This means shifting more funds into the equity market, whether it is local or foreign. This means shifting the aggregate investor from a lender mentality to a shareholder mentality, and, we would better do it quick.

A final thought for the individual investors, investing in the less risky and stable European companies often provides adequate long-term returns. In the past year (1 year price change), Total SA returned 25%, Siemens 43%, LVMH 33%, BASF 46% before dividends, the overall European index 11%. And these are all boring large-cap European equities.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

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