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29 February 2024

Analysts bet on diversified portfolio as crisis bottoms out

Traders at work at Abu Dhabi Securities Exchange. Experts are advising investors to look for long-term returns. (ERIK ARAZAS)

By Sunil Kumar Singh

The global financial market mayhem isn't out of the woods yet. Although the crisis has bottomed out, the recovery still seems far from being uniform and sustained across different markets, leaving investors jittery over where to invest their smart money and how to get it work for them.

Scores of retail investors have burnt their fingers in the recent financial maelstrom. According to Q1 2010 global outlook by Roubini Global Economics (RGE), the global economy began to grow again in the second half of 2009, but the path of the recovery is still uncertain and fragile.

While 2009 brought signs of stabilisation in growth rates and industrial production for many economies, the path to a self-sustaining recovery is not yet clearly shaped and non-stimulus induced private domestic demand remains weak.

So, where should an individual's smart money go in the current uncertain time – stocks, commodities, fixed income, bank deposits, or real estate? What are their comparative risk profiles and what is their separate outlook this year?

Finance and investment experts say when nothing is certain, and the thumb rule is to go for simple options that are understandable to an investor.

"Never do anything you don't understand, and if you stick by that you'll generally find you're okay," said Nigel Putt, Head of Private Banking (Middle East), Lloyds International Private Banking, Dubai.

He said if one were to see a long-term chart of different asset classes, one would realise that from one year to the next the answer is to what constitutes the most preferable assets changes.

"There is no one clear formula and it tends to be very individual. In a recession year, cash is king, while in a growth year equities are king. The important thing investors have to learn that asset allocation has to be dynamic and you've to be ready to change it and allow some leeway to advisors as markets change," he said.

Investment advisors also point out that diversification of asset allocation hold the key in these times.

"In all cases of portfolio allocation, a degree of diversification is recommended. A standard balance would include around 55 per cent in equities, about 30 per cent in fixed income and 15 per cent in alternative assets. At the moment in the equities space, we advocate a significant portion of the equities allocation to the global blue chip stocks. We also favour certain emerging markets, particularly in this part of the world where we still have some good value. So we'll look for diversification across developed world and the developing world trying to apply a value addition where we could and trying to tap into economic growth wherever it can be found," said Paul Cooper, Managing Director, Sarasin-Alpen & Partners, Dubai.

"If I were to rank different asset classes according to their return prospects, I would probably have stocks, real estate, commodities, bonds. However, one needs a balance of all these assets because they all work together in terms of risk control," he said.

He said investors should always look for long-term returns. "If you have a positive view in the long term of an asset and the value of the asset goes down that represents an even more attractive buying opportunity than if it has gone up. The riskier or more volatile the asset is, the longer the time frame an investor should have," he said.

Some investment professionals believe there is nothing called one-size-fits-all when it comes to investment. Oscar Rijcken Voigt, Head of Investments and Bancassurance, Regional Markets, RBS, UAE, said: "There is no uniform investment strategy across the range of investors and across different asset classes. It all depends on an investor's appetite, his investment needs, his own strategies and what assets he already holds as investments."

He said any investor, whether a retail or high net worth, needs to have a sensible diversified investment portfolio across all asset classes and across a range of markets.

"The portfolio should be well balanced between liquid and less liquid products, as well as between long and short-cycle investments. Ultimately, the decision to invest lies with the investor themselves relying on their own judgement and expertise," he said.

Cash is king

One of the common trends visible among many investors is that there is a retreat to low volatility investments, experts said. And cash has emerged one of the less risky assets under this category.

"People prefer holding cash [like fixed deposits] or near cash assets [like bonds]. It's a worldwide phenomenon. Although they have the lowest return but they are less risky," said Neven Hendricks, COO, Deloitte corporate Finance.

Shahid Niazi, Head of RBS Royal Preferred Banking and Business Banking, UAE, said: "Cash is king these days. Since interest rates are low, cash or near-cash situation is advisable in the current environment. This is the asset class which we believe is safer than others. Having said that, in the current conditions, it's very difficult to guarantee a decent return. However, chances are that interest rates might go up this year spurred by recovery prospects. This means investments in instruments like fixed incomes like bonds etc, might go down in value."

According to a survey of fund managers of the Bank of America-Merrill Lynch for February, cash has emerged as the most preferable asset class for global fund managers, with as much as 12 per cent of global asset allocators being overweight on cash. This is the highest level since June last year 2009 and in contrast to a net eight per cent underweight in January.

Equity positions are sharply down. A net 33 per cent of fund managers said they are overweight on equities, down from a net 52 per cent in January. There has been a moderate move back towards bonds. A net 39 per cent of asset allocators are underweight bonds, down from a net 52 per cent a month earlier.

Commodities have fallen in popularity with a net 10 per cent of global investors overweight on the asset class, down from a net 23 per cent. A total of 200 fund managers, managing a total of $502 billion (Dh1.84 trillion), participated in the global survey from February 5 to February 11.

Observing the outlook of bonds as an investment option currently, the Bank Sarasin's global outlook for this year expects to see an interim rise in long-term interest rates, which could already peak in the first quarter. However, the yield curve should flatten in the second half of the year and by the end of the year, long-term interest rates will be below the present level. Credit spreads at the beginning of the year could contract further on the back of falling default rates. However, the yield potential of corporate bonds appears limited.

On the outlook of alternative assets as an investment option, the report said there is little potential for commodities. "Given the expected slowdown of growth in H2, the outlook for commodities appears subdued. Commodity prices should pick up slightly at the beginning of the year, but they could also peak in the first quarter. "Whereas we anticipate a slight decline in metals prices in 2010, we expect energy prices to stabilise. After prices of real estate investments staged a strong recovery in 2009, they are likely to move sideways in 2010," said the report.

In an environment of greater liquidity resulting in dollar weakness and the associated outperformance of risk assets, increased fears of liquidity withdrawal and policy tightening may remain a clear road block to the recovery in equities, according to Chief Investment Office (CIO) weekly report by Bank of America-Merrill Lynch released last week.

"We expect these fears to persist in the near term until markets have adjusted to tighter liquidity and become more confident about the pace of the recovery, and especially the strong growth in corporate profits," it said.

Outlook for equities

Equity markets are definitely having a tough time in the face of greater European sovereign risk and a reduction in liquidity from the recent upward moves in the US dollar, it added.

According to Bank Sarasin's global outlook for this year, equity prices at the beginning of 2010 should initially receive a tailwind from the surprisingly positive macro data and corporate results. Moreover, equities should profit from a further decline in risk aversion. Many investors who invested their money in assets with a zero return will gradually switch into more risky assets with higher yield opportunities. But since economic growth in the US is likely to weaken in H2 2010, the risk of a setback will increase during the year. "We expect European equities to put in the best relative performance in 2010. Emerging market equities are likely to suffer the most during a correction of risk assets," the report said.

"We favour the stocks of companies from the industrialised nations with a strong presence in the emerging markets. With respect to stock selection, we focus on large cap quality stocks, which offer a high dividend yield or above-average growth," it added.

According to Bank of America-Merrill Lynch's latest quarterly report titled 'Mena Strategy' released last week, by Q4, the Mena as a whole and the Gulf, in particular, could begin to attract increasing investors' attention. During periods of market turbulence, many argue for buying the dips in the early stages of corrections. Yet as the sell-off extends on seeming deterioration in fundamental news flow, fears grow that corrections presage the start of a bear market – shorting risk and owning defensives become talking points. Wounded bulls opt against being heroes and wait for signs of turn in sentiment. "Yet when de-risking rather than fundamentals are the cause we think: corrections = opportunity," the report added.

Analysing the outlook of different sectors, the report said 2010 is likely to be one of transition for the Mena banks as those less affected by the downturn push through a recovery while laggards continue to search for a resolution.

About telecom sector, the report said: "Three themes drive our thinking about Mena telecom in 2010: growth, M&A and prospects for improved shareholder returns. In summary, we prefer those operators, which can benefit from improving economic growth and rising market share and have few apparent regulatory or competitive threats.

"The Middle East and North African markets comprise two very different groups of telecom operators – the reasonably mature, wealthy mobile markets within the GCC and the lower penetrated, lower GDP markets of North Africa.

"A first look would thus draw investors to North Africa where growth prospects remain, as not everyone has a mobile telephone. Furthermore, we would argue that the lower GDP per capita setting in North Africa provides operators with greater sensitivity to a cyclical upturn."

On GCC stock valuations, the report said: "We see valuations as a generally positive factosr entering 2010 – investors are well paid for the credit risk in the higher quality GCC corporates where we see the default risk as low. For the GCC, therefore, our focus in 2010 remains on the stand-alone strength of the companies and the respective sovereigns' implied support and quality [both in terms of willingness and ability]."

However, when it comes to the prospects of regional equity markets, analysts have a positive view.

According to Bill O'Neill, Director and Portfolio Strategist, Merrill Lynch Global Wealth Management: "The investor can opt for investing in equities especially cyclicals on any market setback. Be long US-dollar proxy currencies or pegs. Avoiding debt instruments, particularly sovereign debt with a stronger focus on corporate paper, appears sensible in the current market conditions. Besides, the portfolio should look to be below target weighting in commodities and cash, and overweight direct property assets."

"The stock market's outlook is good in the medium and long term for clients wishing to invest in the region as the regional equity markets are cheap. Additionally the macro fundamentals and government finance remain positive," said Cooper.

There has been a retreat from real estate in the region and investors have gone underweight on this sector at the moment. Equities that are being chased in the region are generally those that are into non-real estate sectors, such as financial services sector, infrastructure, etc, said O'Neill. "If I were to construct my portfolio, I would allocate 30 to 40 per cent of my money into cash, then 30-40 per cent into equities, and the remainder into near cash assets like bonds or fixed income instruments," he said.


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