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Navigating a tricky environment.

Summary: IN AN ALL-STAR PANEL AT THE WEALTH ARABIA SUMMIT 2016, EXPERTS FROM AROUND THE WORLD GAVE INVESTORS ADVICE ON HOW TO INVEST IN AN UNCERTAIN FUTURE

Make no mistake--these are turbulent times. If any expert is telling you different, or is telling you they know exactly what the future will bring, either they are lying or they have a crystal ball. But even in this uncertain period, that doesn't mean that investors should take all their money and shove it under their mattress. Investors, now more than ever, should be investing, but they need to have a strategy.

For Conor McGorrian, Portfolio Strategist -- Fundamental Equity, State Street Global Advisors, that strategy should be focused on equities, and on finding equities that provide value in the long term. In McGorrian's eyes, that is a matter of what the company is valued at in relation to its actual value. "The key focus for investors here has to be, and it always has to be, about valuation. There's no doubt that there's always uncertainty--in my career I've seen tech boom and bust, I've seen bubbles form and burst; there is always something for investors to worry about. But if you focus on valuation, find good quality businesses that are undervalued by the market, and have the patience and discipline to stick with it, then over the longer term you can generate much better returns for your clients."

In any investor's mind, risk is a main concern. But without diversification, so-called 'safe' investments could prove risky in the long term. "From an investor's point of view, it's about making sure the risk profiling of your portfolio is correct, that you're comfortable with the risks you're taking, and that you have the courage of your convictions. Diversification does not mean buying a second piece of property," said Robin Amlot, Chief Executive Officer, CPI Financial.

"Diversification is something we haven't been able to address in the region," said George Triplow, Executive Director -- Wealth & Asset Management Leader MENA, Ernst & Young. "So when you look at the investor set in the region, how diversified are they actually? We see more and more GCC investors wanting to invest in similar products that they already have. We see expats who take money out of the region. So then, how diversified are the investments in the region?"

But it's not always the investor's fault-- sometimes the economy in which one is investing causes a lack of diversification. "If you're focusing on this particular region, the challenge of this particular region is that the economies themselves are not particularly diversified," said David Staples, Managing Director, Corporate Finance EMEA, Moody's. "Even if you have a diversified portfolio, you have exposure to the macroeconomic impact of commodity-based economies where government investment is a driver for growth. So thus, government policy and the effectiveness of changing government policy during periods of transition becomes extremely important, and challenging issues for people who may be focusing on investing in corporates and financial institutions and have to overlay that with the issue of sovereign macroeconomic investment risk. At least in the GCC you don't have the currency issue to worry about as you do in other countries, but the big challenge is how much access you need to the liquidity in your portfolio. I don't find this to be a region with a lot of liquidity depth and that becomes an issue."

But not everyone believes diversification is the only path forward for investors. "I think diversification isn't working right now because the world we were living in for the last couple of years, where central banks pushed investors to look at equities for yields and fixed income for capital appreciation, has become very challenging," said Hussein Sayed, Chief Market Strategist, FXTM. "Even the correlation in the markets now, we can see that yields are moving in a different way than they have traditionally moved. I think we have to look away from traditional investing and look at alternatives for the time being. Hedge funds are worth looking at."

The riskiest path may be the one that appears to be the safest--investing only in the market they are most familiar with "For a lot of investors, the temptation is to focus on the home market, the areas investors know best. But I think that's very risky. Income funds look extremely expensive, but I think there are parts of the equity market that offer reasonable prospects for the future, including the industrial and financial sector. They are optically very risky, but valuations are very cheap at the moment, and that gives the investor a margin of safety when they look at those areas," said McGorrian.

But though investing can often be in the public good, if you invest your emotions as well as your capital, things could get messy. "You have to strip the emotion from it," said McGorrian. "Investing is a tough business, and if you are going to get emotionally involved with businesses it's going to make it very hard to make rational decisions about them. It's about fundamental analysis-- understanding the businesses you're investing in, why you think they're cheap today, what you see differently from other investors in the market. You then need to be very rational and disciplined about when your exit point is going to be from that investment as well."

But while analysis is important, it is not always possible. "One of the challenges that face international investors looking into in the GCC region, as opposed to investors that are already here, is access to sufficient information to take a fundamental analysis," says Staples. "Sometimes investors here have better access to information that can assist them to make decisions about investment more than international investors have."

Things are getting better, however. "We can see a transformation in governance happening, and I hope that it will be a fast process," said Sayed.

"The markets here are evolving quite quickly in terms of transparency, governance, and the instruments that are available," said Amlot. "It is inevitable that there will be teething problems, mistakes, and wrong doing, as life is like that and these things happen, but the one thing that needs to happen is increasing the depth of the markets, as they are still very small still. If you look at the bonds available here, they are either government or government- related entities, unlike in the European markets or the US."

Even as things change, they don't always change for the better. Change creates uncertainty, and the investment landscape has changed a lot since the last generation of investors built the economies of the GCC into what they are today. "We're in a different world from the investors who came up in the previous generation, a different environment," said Triplow. "Why do markets continue to go up? It's fundamentally about valuations, and sector focus. People have been let down constantly by markets as there's too much volatility. It's very difficult to let clients understand long buy and hold--they want to sell out as soon as there's a blip in the market. Investors want something they can hold in their hand."

The unexpected changes in commodity prices in the region--namely, the drop in oil price, has forced the GCC to change-- and it is making the changes it needs to ensure long term success. That's the kind of change that investors can get behind. "What I think is good for the region with the substantial decline in oil prices is that it's forcing governments and companies to diversify and seek capital elsewhere," said Staples. "And when they seek to diversify their capital, they're forced to become more transparent, and that generates greater interest. And when there's greater interest and greater opportunity for investment, that sparks a change in thinking. It's very easy to be critical of the investment style of the region that people have talked about as too name and region-driven, but there haven't actually been all that many opportunities. There are some very good companies in the region that are very good at telling their stories, but with the opening of the Saudi market, and the change being made by Saudi leadership, there will be a forced increased transparency. When ARAMCO comes, even with a small issuance, it will increas in transparency, and that sets an example. There will be a larger number of opportunities for people to consider, and that creates an environment where investors can think more about diversification and a change in style."

As investors chase high returns, the goal needs to be put in perspective, according to Amlot. "There's two things-- understanding of market risk, and understanding one's own appreciation of that risk. It needs to be understood that wealth management is just that--it's not about making spectacular returns, it's about protecting it, and maintaining it's value so that it can be passed on."

A steady trigger finger is an asset as well. "I would have thought given the commercial culture in this region that people have generally made their money through business you don't change your business plan. Investors are always tempted to buy at the top when everyone's very enthusiastic, and selling when things are at the bottom and everyone's in a panic. Looking at the 2006-7 markets, if you'd stayed, you could have done pretty well. It's about sticking the course over the longer term," said McGorrian.

Old adages don't always hold true, however. "As Buffet said himself, I made all my money by selling too early," said Triplow.

[c] 2017 CPI Financial. All rights reserved.[c] 2017 CPI Financial. All rights reserved. Provided by SyndiGate Media Inc. ( Syndigate.info ).
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Publication:Wealth
Date:Jan 31, 2017
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