Date
26 May 2017
Gas distributor shares saw a sell-off on rumors of a cap on return only to see a quick rebound when investors realized the cap is in fact largely in line with existing return. Photo: Reuters
Gas distributor shares saw a sell-off on rumors of a cap on return only to see a quick rebound when investors realized the cap is in fact largely in line with existing return. Photo: Reuters

Good investment return comes from taking the right kind of risk

As soon as some bad news comes out, most investors react by dumping related shares. Is running away from risk always the right move?

If you are only interested in risk-free income, buy some government bonds or put your money in a bank.

But if you want more, higher rewards typically comes with risk.

A key to making profit for life insurance firms is selecting the right type of people (relatively healthy ones ) as customers. That means taking the right kind of risk; the same concept applies to investment.

By the right kind of risk, I mean investors should embrace investments that look risky on the surface but are actually safe while shunning investment opportunities which look safe but are actually dangerous.

For example, China is reportedly considering a 6 percent cap on the annual rate of return on assets for natural gas distributors in urban areas. The news triggered an immediate sell-off.

However, if we look into the financial statements of mainland natural gas distributors, their average asset return is only about 5 percent. Therefore, the move may not necessarily slash their earnings, so it is not as risky as it sounds.

Meanwhile, the natural gas sector has seen a slew of good news over past month. The authorities have reduced the value-added tax. And China has recently signed a major LNG (liquefied natural gas) trade deal with the US, which may help cut upstream costs for Chinese natural gas suppliers.

Natural gas stocks staged a quick rebound soon after.

This article appeared in the Hong Kong Economic Journal on May 16

Translation by Julie Zhu

[Chinese version 中文版]

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RT/RA

Columnist at the Hong Kong Economic Journal

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