2008 Investments Expected to Yield below 20%

Financial experts believe that “risk management” will be key to this year’s successful investment. The analysis reflects several financial uncertainties at home and abroad, to include China’s budget-tightening policy and the financial crisis related to subprime mortgage loans. Given recent developments, a majority of financial experts argue that assets should be managed in a conservative manner and that the target for the rate of return on investments set below 15%.

This comes from a Dong-A Ilbo survey of 100 private bankers (PB) about the prospects for this year’s investments.

○ Management strategies like diversification

In 2007, investors who put their money into funds gained large returns. In terms of stock funds, domestic funds yielded 35.26% on average while foreign funds averaged 29.54%.

When asked to pick the best way to increase wealth from a list of multiple choices, 99 PBs chose fund products. The answer was followed by short-term financial vehicles such as money market funds (74), real estate (73), special deposits (58), and conventional deposits and installment savings (45).

In the survey, all of them agreed that investors need thorough “management strategies” such as diversified investments.

Kim Seon-hwa, banking team leader for Shinhan Bank’s Private Banking at Jamsil Center, cautions, “This year, investors need to put a priority on risk management since recent financial volatilities, such as a global economic slowdown and the US-subprime mortgage loan crisis, are expected to continue through the near term.

Especially, investors should closely watch fund products investing in China which yielded 54.64% last year. Lee Soo-bok, banking team leader for Kookmin Bank’s Private Banking at the Olympic Center, warns, “The Chinese government is highly likely to reduce its budget and China’s stock prices may drastically fall after the 2008 Beijing Olympic Games.”

○ Ratio of Domestic to Foreign Funds: 4 to 6

Many PBs answered that investors should set their expected rate of return in a conservative manner.

When asked about the expected rate of return in 2008, more than half of respondents (52) said investors should set their expected rate of return between 10-15%. It was followed by 15-20% (41), 5-10% (3), 20-25% (2) and less than 5% (1). In total, 97 out of 100 private bankers answered that investors should set their expected rate of return below 20%.

When asked to choose the most prospective market, 63 respondents chose Korea. Other emerging markets were recommended such as Vietnam (53), China (46), Russia (45), Eastern Europe (27), India (24), Middle East and Africa (17), and Latin America (14). The survey showed that financial experts believe that the ideal ratio of investment into domestic fund products and foreign fund products should be 4:6.

With risk management through diversification essential for successful investment, PBs are looking to diversify stock fund investments into emerging markets like Asia, Middle East, and Latin America this year.

In the survey, the most recommended fund (44 respondents) was Schroder Investment Management Limited’s BRICs stock fund. The fund was acknowledged as a good product since it invests in diversified markets like Brazil, Russia, India and China.

According to the survey, the most recommended portfolio to invest 100 million won was: fund products (39.6 million won), real estate including REITs (19.5 million won), deposit and installment savings including special deposits (16.2 million won), short-term financial products including money market funds (8.2 million won), direct stock investments (7 million won), and investments in other areas like gold and art work (9.5 million won).

○ Hold realistic expectations for real estate investments

When asked about real estate investments, 73 of respondents considered shopping districts as profitable. Others were: reconstructed apartments (55), office buildings (41), land (36), and one room flats (23). Aside from office buildings and shopping centers, respondents expect easing regulations by the new government to help reconstructed apartments garner better margins from sales and rental fees.

When asked, “Which area will become the most profitable with the inauguration of Lee Myung-bak?”, almost half of respondents (47) answered reconstructed apartments. It was followed by land near the proposed canal (23), old housing and land in the vicinity of public transportation (20), and medium- to large-scale apartments (10).

Nevertheless, many respondents warned that investors should not hold unreasonable expectations.

Park Seung-ahn, banking team leader for Woori Private Banking at the Gangnam Center, says, “The Lee Myung-bak government is highly likely to make an all-out effort to stabilize real estate prices. Helped by deregulation, some reconstructed apartments in Apgujeong and Songpa are expected to enjoy price increases. However, they are not likely to surge dramatically since the supply of housing itself will increase overall.”

Park Ki-seop, banking team leader for Shinhan Bank’s Private Banking at Gangnam Center, says, “Although the upcoming Lee Myung-bak government will stabilize real estate prices by increasing housing supply, there is a plan to redeem a portion of unearned income. Therefore, it remains to be seen whether the price increase of reconstructed apartments translates to profit for investors.”