A mix of ‘defensive’ stocks and those with upside potential will be key
It is mostly a fool’s errand to try and derive the meaning of why the market did and what it did on any given day and why.
Unfortunately, history is one tragedy after another. And yet, the market has rewarded investors who have been able to separate their money from their emotions. War and terror do not stop the world from moving forward.
War and terror does not stop the world from moving forward. It feels trivial to think of markets and portfolios at such times, and the reality is that maybe it is.
History, however, is a great indicator of what builds wealth and how it is done, and the forces of gravity and reversion to the mean is what leads to the message of wealth creation over time. As David Swenson likes to say, as an investor in an inflation-prone world, you are likely to be better off as an owner, not as a lender.
This is why over the long-term, investments in bonds, art and other such investments become problematic. Most of that commitment should be in the form of publicly traded equities, especially in times of war.
As history books show, the American equity markets bottomed out in 1940-41, well before the end of the Second World War.
This is why over the long-term, investments in bonds, art and other such investments become problematic. Most of that commitment should be in the form of publicly traded equities, especially in times of war. As history books show, the American equity markets bottomed out in 1940-41, well before the end of the Second World War.
There were considerable gyrations, but in hindsight, these were times to buy, especially when the crowds could not distinguish between the wheat and chaff. In American markets, we have seen a compression in valuations, but only in sectors that were insanely overvalued to begin with.
In the UAE, the valuations have been coming at from a different end, and recent events have made companies that offer value even cheaper, as anxiety has taken over. There will always be Black Swan events which by definition are unanticipated, but the problem is not to fixate on them but look at simple variables such as valuations, dividends and prospects for growth.
What’s your investment mix?
This can be done through individual stock selection, the picking of activist mutual funds or low cost index funds. Whichever route is taken, valuations are and always should be the starting point of any decision-making activity.
For stocks as well as real estate, this by definition implies looking at book and replacement values, with a close emphasis on what management is doing with the earnings they are generating. Companies like Union Properties, Gulf Navigation and Amlak fall into the turnaround stories, whilst blue-chip stocks like DEWA, Salik and Empower are in the defensive category.
As the risk spectrum changes, other companies – like from the ADNOC portfolio – come into focus. At the growth end of the spectrum there are companies like IHC, Emaar and Bayanat.
In each bucket, depending on the risk profile of the investor, there are opportunities galore for the common investor, and there appears to be a change in sentiments going on as people start focusing on stability rather than a ‘growth at any price’. It is always more glamorous to talk about the next new startup, but the reality is that these can only account for a small fraction of any portfolio.
In each bucket, depending on the risk profile of the investor, there are opportunities galore for the common investor, and there appears to be a change in sentiments going on as people start focusing on stability rather than a ‘growth at any price’.
Don’t go into the risk-off shell
Given current events, the natural impulse is to move to a risk-off portfolio, but this is exactly the time to overcome such sentiments and focus on valuations instead.
It is entirely possible markets may fall further and cause further anxiety. However, as Confucius said, we need to study the past if you want to divine the future.
Meantime, we are blessed that portfolios are the source of anxiety as opposed to things that threaten our existence. In the UAE, the ecosystem that has been put into place necessitates that the pace of change will accelerate, regardless of geopolitical concerns. And which implies that the stability that is in place by definition will continue to attract and generate capital.
This in turn must imply a rising of all boats in terms of valuations – and even more so in times of strife when ‘Mr. Market’ comes bearing gifts.
Sameer Lakhani
The writer is Managing Director of Global Capital Partners.
