Is there anywhere left to invest?

With stock markets plummeting, anxious investors are asking whether there is anything left to invest in.
Is there anywhere left to invest?
By Tom Arnold and Andrew White
Sun 16 Nov 2008 04:00 AM

With the world's stock markets plummeting, is there a safe haven for your investments?

"If you have $1000 what are your options? Investing in bonds, stocks and commodities, or putting it under the mattress. The mattress is a risky place, as we all know," says Burkhard Varnholt, CIO of Bank Sarasin, a leading Swiss private bank.

Those investors that have been hit hard by the recent global economic turmoil may be forgiven for raising an eyebrow at Varnholt's classification of the mattress as a "risky place". They may be forgiven for thinking that the mattress is the only safe place for any cash they might have left in the aftermath of the international market meltdown - after all, they're certainly not going to put it into a bank.

With the spiral into worldwide economic recession showing few signs of easing, anxious investors across the Gulf are asking whether there is anything worth left investing in. However, for those investors willing to put aside emotional sentiments and exercise discipline there may yet be opportunities to come out of the adversity.

"The question is not really what is left to invest in, but how much more investment opportunities have suddenly emerged," says Giyas Gokkent, head of research at National Bank of Abu Dhabi. "It's true that people often say, you can't time markets, but most would agree that impassionate, disciplined investors now will likely get a handsome return on their investments in the months ahead."

Today, fear continues to stalk Gulf markets, leading to stocks plummeting and panic-stricken investors faced with the option of selling off shares or watching their portfolios crumble. What began as a credit squeeze in the US last year has escalated to become a fully blown economic crisis, bringing major financial institutions to their knees and leading to world governments having to pump billions of dollars into their economies in an attempt to restore shattered confidence in markets.

A glance at the Gulf bourses' 2008 performance is enough to make already cautious investors run for the hills. In the six month period from April 1 to September 30, Dubai Financial Market has provided a negative return of 24.04 percent, while Abu Dhabi Securities Exchange has offered a negative return of 14.25 percent.

The markets outside the UAE have fared little better, with Saudi Arabia's Tadawul providing a -18.27 percent return, Muscat Securities Market -16.61 percent, Bahrain Stock Exchange -11.72 percent and Doha Securities Market -3.41 percent.

Real estate, once a surefire sector for opportunistic investors hoping to double their money in a couple of years, now looks a risky bet. Shares in UAE-based Emaar Properties, one of the largest real estate firms in the region, last week slipped below the five dirham mark to their lowest level in four years.

Banks too look an uncertain investment as concerns surface over some institutions' capital strength. Shares in Kuwait's Gulf Bank, which has posted two straight quarterly profit declines, have tumbled 36.48 percent in the year to date, with shares in Commercial Bank of Qatar reaching a 52 week low last week.

Outside the Gulf, things are even worse. According to Bloomberg data, of the world's 89 indices, only three have made gains this year - in Ghana, Ecuador, and Tunisia. Icelandic stocks have taken the most severe battering, down 95 percent year-to-date, while the financial powerhouses of New York, London and Tokyo are all struggling. The S&P 100 is down 40 percent year-to-date, the FTSE 100 down 35 percent, and the Nikkei 225 down 45 percent.

The turmoil has led to a serious squeeze on consumption, and oil - the main source of income in the Gulf - has dropped like a stone through the $70-a-barrel level many analysts believed would act as a support price.

It is not alone - a plunge in commodity prices has signalled the end of the so-called super-cycle many materials have enjoyed, with copper and wheat prices falling more than 50 percent from records earlier this year.

Prices of steel and aluminum, commodities both suffering a dip in demand, have also slid from highs in July and August.

So where to look? Some analysts believe investors looking for shelter from the financial storm for their money could find it in the markets of the fast growing BRIC countries - Brazil, Russia, China and India. China, the biggest contributor to world growth, last week unveiled a $586bn plan to sustain its economy, while forecasters believe India's economic growth is proving more resilient to the financial crisis than most others."The economies of India, China and Brazil will do better than the US and Europe for the next 12 to 18 months," says Sameer Al Ansari, executive chairman and CEO of Dubai International Capital (DIC). "We continue to look for opportunities in these markets and to wait for better value in North America and Europe."

Shiv Prakash, an equity investment analyst with Dubai-based MAC Capital, agrees. "One can look towards the Indian markets which won't go into recession soon as they have good fundamental stocks and a good story there," he says.

Closer to home, with strong quarterly and nine month growth registered, Qatar's market provides a compelling argument for investment, believes M.R. Raghu CFA, FRM, senior vice president of research, at Kuwait Financial Centre.

"The UAE may have still a lot of banking and real estate concerns going forward. Hence, I would very strongly bet on Qatar," he explains.

While real estate and the banking sectors may be best avoided in the current climate, analysts say investment opportunities still exist in stocks in sectors of the economy which can offer solid - if not spectacular - returns.

"For a long term investor what you are looking for is companies with predictable cash flows, understandable business models and very little volatility of earnings," advises Robert McKinnon, the head of research at Al Mal Capital in Dubai.

He singles out Gulf telecoms operators Mobily, Saudi Telecom Company, Etisalat and Zain as good purchases. "Telecoms companies almost across the board throughout the region have very predictable cashflows and they have still got decent valuations."

At National Bank of Abu Dhabi, Gokkent believes telecoms and blue chip firms are an "easy call" for equity investments going forward. "In principle, anyone investing in a diversified GCC equity basket is likely to get a handsome return over the medium to long term," he says.

He says the current volatility in global currencies means now may be the time to diversify portfolios away from the dirham or other dollar-pegged currencies.

"A UAE investor who would have found euro, pound and emerging market currency assets - for instance Turkish Lira - too expensive earlier, now has an opportunity to shift his or her currency portfolio to currencies other than the dirham," he says.

Although growth in commodities is slowing down, analysts are predicting the asset class is on the verge of an up-cycle following a softening of prices of oil, metals and food grains from their peak levels in the first half of this year.

Prakash, of MAC Capital, forecasts a corrective bounce in crude oil towards $85 in a few months time. "I recommend investing in this commodity with a tight stop loss near $45, with OPEC looking willing to further cut production which can be positive for crude," he says.

After a recent slide, Prakash believes the price of gold is undergoing a correction as it nears its support levels, offering another asset class worth buying into.

He recommends a buy "near $650 to $680 levels. One can enter for a buy for long term duration for a possible test of its previous highs of $1030 in the next year".

Meanwhile, Helen Henton, head of commodity research at Standard Chartered Bank in London, believes food products such as grains could be a strong proposition for long term investors. "Agricultural products towards the end of next year will look quite strong as low prices will discourage planting," she says.

As the financial turmoil continues to weaken international markets, the relative security offered by government bonds could offer another safe haven for investors' money. Sukuks, Islamic equivalents of bonds, issued by Government-owned entities in the region, are also available.

"For institutional investors, government bonds have really rallied a lot over the course of the last several months and one wonders how much lower than they go other than at the very front end of the yield curve," says Jack Malvey, chief strategist, at Barclays Capital in New York.

Iyad Duwaji, CEO of Dubai-based Shuaa Capital, agrees: "Bonds over equity in the short term, because in every recovery spreads of credits start to tighten way before equities reach the bottom."

For those investors still prepared to splash the cash in these uncertain times, there may be a myriad of opportunities amid the chaos. And yet, with such economic turbulence buffeting asset classes the world over, it may be some time before those same investors are able to sleep easy.

Sameer Al Ansari

Sameer Al Ansari is Exec Chairman and CEO of Dubai International Capital. Under his leadership, DIC, which is owned by the ruler of Dubai, has emerged as a leading global investment company and controls around $13bn in assets around the world.

"This is without a doubt the most difficult investment environment ever. The world is facing a very serious financial crisis which will pull us into a deep recession. It will take several years rather than several quarters to turn things around.

"This is not the time to be brave. One has to be very conservative and to preserve capital. It is not about ‘return on equity' it is about ‘return of equity'.

"The economies of the region, India, China and Brazil will do better than US and Europe for the next 12-18 months. We continue to look for opportunities in these markets and to wait for better value in North America and Europe."

Kevin Lecocq

Kevin Lecocq is CIO at Barclay's Wealth, which as of December 2007 had $198bn of assets under management. He is responsible for investment management, fundamental and quantitative research and product sourcing, structuring and development.

"Many of our clients are fairly cash rich right now, and we think that for them, the depressed states of the markets will offer excellent buying opportunities over the next year or so. We think the financial crisis has been, to a degree, floored.That doesn't mean we can't make a new low in the market, it's quite likely that we will. But the seismic shifts in the markets can't occur again like it did in October and September.

"We're advising our clients to move from cash over the next couple of quarters into a more risk open position in equities and credit, starting with credit. There are some excellent opportunities in corporate credit, companies that have very good cashflow situations; they're very solid with their debt. It's the baby thrown out with the bathwater - spreads have widened, and those are very attractive assets."

Iyad Duwaji

One of the most prominent investment bankers in the Gulf, Iyad Duwaji is CEO of Dubai-based Shuaa Capital, which manages over $2bn in assets.

"Geographically, we are recommending the GCC and India over the rest of the developed world and other emerging markets. The GCC is supported by good demographics and government spending that is driven by rising demand for energy (even if oil now is down), and India is a domestic growth story.

We are recommending bonds over equity in the short term because in every recovery, spreads of credits start to tighten way before equities reach the bottom.

We have seen this in the last tech bubble - credits lead equities on the way down and the way up.

We are also recommending private equity over public equities, or even private investments in public enterprises or what we call PIPE investments.

As for specific companies, we favor sectors that are unrelated to real estate - sectors like airlines (Air Arabia), telecoms (Etisalat and Zain), and tourism.

Also, we would recommend companies that are sitting on a lot of cash such as Air Arabia again, or the last firm to IPO before the crisis, Drake & Skull - it raised $300m that is now with the company."

Jack Malvey

Jack Malvey is chief strategist at Barclays Capital in the US. A member of the Fixed Income Analysts Society's hall of fame, Malvey previously worked as chief global fixed income strategist for Lehman Brothers.

"If you're talking to an individual they might be most interested in tremendous capital preservation safety, and the most conservative investments of short maturities are things like short daily treasury securities and local currency treasury securities.

"For institutional investors, government bonds have really rallied a lot over the course of the last several months and one wonders how much lower than they go other than at the very front end of the yield curve.

It's time for investors to put aside their understandable reservations even on high quality credit products, and actually use their cashflows to effectively take advantage of some of the exceptional opportunities. So actually high corporate bonds and agency bonds, not just in the US but around the world, are very attractive and all on the cheap side."

Bob Greifeld

Bob Greifeld is CEO of Nasdaq OMX, which controls and operates the second largest exchange in the US. With approximately 3200 companies, the NASDAQ has more trading volume per day than any other exchange in the world. The group also operates eight exchanges in Europe and holds one third of the DIFX.

"I have a report on my desk which shows the different responses from the different governments around the planet, and it's quite impressive - we're clearly getting a network affect. I think to the extent we have gone into a synchronised recession, we probably have the ability to come out into a synchronised recovery.

"We're in a globalised world, and while different governments have done different things, they've all responded in roughly a similar time frame and in a similar way. We're in a worldwide recession, and the tonic for that recession will be uniformly applied - the recovery phase will happen in a synchronised fashion."

Shehab Gargash

Shehab Gargash is CEO of Dubai-based Daman Investments, which manages assets worth around $1.4bn. The company was formed in 2000 as a joint partnership by a group of prominent UAE investors.

"The key word in the period ahead is value investing, whereby there is a huge discrepancy between what an asset is worth and what people are willing to sell it for. This cuts across all asset classes, so there isn't a specific asset class that will necessarily shine above all others. Furthermore, in the short term we are seeing a filtering process that has come about due to a general panic mode that we find our economies in.

"This is bound to shape our investment environment for the period to come, defining what ends up being a ‘value' proposition when the investors find their way back to the markets. As we stand right now, the buyers are in no hurry to jump in." Leon Howard-Spink

Leon Howard-Spink is a fund manager with global asset management company Schroders. He is one of Europe's most consistent European equity managers, having outperformed the sector average in each of the last five years.

"Hopefully going forward there will be more segregation between the winners and losers. What I am looking for in these winning businesses? I'm looking for companies that do something different, as this gives you pricing power. If you have a unique technology or are generating products and services from a unique asset base, that means you can price above what your competitors can and that's great news.

If I only had one rule for investors it would be to invest in market leaders. Of course you can think of big market leaders and big industries, but even within smaller industries you can find niche market leaders.

"I try and emphasise in my portfolios structural growth - whether it's something driven by demographics, environmental awareness, regulatory changes, or just changes in the way people are living, spending their money, or eating. Try to hop on board companies that are exposed more towards those structural areas of growth rather than cyclical ones."

Musaed Al-Saleh

Musaed Al-Saleh is Vice Chairman & CEO of Kuwait-based National Projects Holding Co, which is invested in a series of real estate projects across the Middle East and North Africa region.

"In terms of investments these days, I would consider ‘recession proof' sectors such as waste management and environmental services. I would identify companies that have operational profit and haven't been affected by share price fluctuations.

"The largest environmental services company in the world has lost over sixty percent of its market value, so there are great opportunities out there. You have to keep in mind that there will always be a need to collect waste despite economic downturns.

"It is also a blessing that President Barack Obama sees investing in the renewable energy sector as a way out of the financial crisis. These new investments are expected to produce hundreds of thousands of new jobs that could help bring down the unemployment rate and stimulate the US economy."

David Pace

David Pace is CFO of Bahrain-based Islamic financial giant Unicorn Investment Bank. He has 30 years of international experience in finance, IT and management consultancy.

"Investor confidence has clearly taken a severe hit and it's very tempting for investors to sit back and shun the markets until some sense of normality returns and confidence begins to recover. However, I don't believe that investors are out of options, or that they should necessarily sit on all of their cash.

"We believe that the climate is particularly conducive to private equity transactions, particularly smaller deals that are not overly dependent on leverage and debt financing. Valuations have fallen rapidly in recent months and sellers have become far more realistic about what they expect from a private equity partner.

"Investors would do well to consider shifting their focus to Islamic/asset-backed products whose value may decline if asset values fall but will not disappear overnight as we have seen in the conventional banking system."

Burkhard Varnholt

Burkhard Varnholt is CIO of Bank Sarasin, a leading Swiss private bank specialising in asset management, investment funds, securities trading and investment counseling. He previously worked as global head of financial products and investment advisory at Credit Suisse.

"I think there will be a very rude awakening for many of the government bond holders, who are not taking into account that government bond yields could rise quite significantly next year, and if and when they do that, that would take the value of those government bonds down. "Also, economic weakness could hit governments more severely than some privately run companies in 2009.

"Stocks are probably the cheapest asset class for both small and large investors. The trick will be to focus on high quality stocks, companies whose business models are largely autonomous from this cycle and whose balances are well funded for the next 12 to 18 months so that they will not be affected by this capital rationing, which is likely to persist for at least the next 6 to 12 months."

With additional reporting by Soren Billing and Tamara Walid

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