Investment strategies for troubled times
Will things get worse in 2009? As the world economy staggers we ask five of the markets sharpest minds to put things in perspective and offer their views on the road ahead

Small investors think that institutions have an edge over them as they have access to better market information, financial data, modelling etc, but this is not necessarily true. Fund managers are usually driven by a herd mentality, as most institutions benchmark themselves against their competitors. As a result 80-90 per cent of the fund managers all around the world underperform the market. Thus the smart investor is actually not so smart and an average investor can thus buy into the market and do well.

Worst year in living memory
The year 2008 was the worst year for stock markets the world over, since the Great Depression in the 1930s. Over $31trn has vanished from the markets (excluding the losses on housing mortgages). International markets have fallen by anywhere between 30-70 per cent. Currency losses have been to the tune of 70 per cent. The sub prime crisis has led to a global credit contraction. The amount of wealth that has been eroded cannot be recovered in the next year or two years and will take a longer time to create. Gulf economies were doing well till June 2008 as oil prices touched a historic high of $147 per barrel. MSM touching an all time high of 12,000 points. Starting at 9000 points in January, the index was up by 32 per cent in the first six months of the year. Surprisingly, during these months the Saudi Arabian and Kuwaiti stock markets were falling and the MSM was the only outperformer.

The sub prime crisis and the ensuing credit crisis forced institutions and individuals to deleverage their investments leading to a severe fall in all asset classes. Oil prices fell from $147 per barrel in July to a low of $34 per barrel in December 2008, a drop of 70 per cent. Gold fell from $1000 per ounce in 2007 to $700 per ounce in 2008. Commodities have lost over 40 per cent of their value. A lot of speculative money that was coming into the Gulf stopped suddenly. As a result the MSM crashed by 50 per cent in five months from July. Overall, the markets are down by 32 per cent for the year, the severest fall that the MSM has seen in such a span of time.

Despite such a fall the MSM has done better than Saudi Arabian and the Dubai Financial Markets which fell by 65 per cent. Banks in Oman do not have the same kind of exposure to the real estate market as Dubai, largely because the Central Bank of Oman has pegged the limit for real estate lending at eight per cent, but a lot of funds have found their way into real estate and the stock market as the end use of such funds is not usually checked. Once things started to deteriorate the Central Bank of Oman and the government intervened with a number of measures like increasing the loan-to-deposit ratio to 87.5 per cent and cutting the cash reserve ratio from eight per cent to five per cent. Oman is not as vulnerable to the world as some other markets are due to the insular nature of its economy.

Looking ahead
Investor confidence is low and there is uncertainty in the market. I expect corporate profits to come down as the nominal GDP will contract in 2009. So how does one go about investing in 2009. Generally there are two approaches to investing, one is the technical, which takes into account charts and fundamental approach which is based on balance sheets and whether a stock is trading above or below value. The GBCM approach is based on Core Value investing, which translates into buying a dollar when someone is selling it for 50 cents and then selling it at par value. We believe in the Value Investing approach propounded by Benjamin Graham, he says, “Markets are manic depressives, in the short term they are voting machines but in the long term they are weighing machines.” Everyone should invest keeping in mind their margin-of-safety, as these are the three most important words in investing.

Further there are two ways to choose – the top-down or bottom-up approach. The top-down approach looks at which industry will do well in future, oil price projections, the country’s deficits etc. The bottom-up approach is about looking at the profits of a company, the size of its assets, NPAs and then going to the top. I believe that investors should us the latter approach.

Says Warren Buffet, Chairman, Berkshire Hathaway, “An investor should invest within ones circle of competence,” he adds, “It is not how big ones circle of competence is but how well you define the parameters.” Retail investors usually do not understand sophisticated industries or companies but in Oman most of these are easy to understand. Once you have identified companies that you would like to invest in, then one should look at the value of these companies. This can be done by zeroing in on, ‘the present value of the future free cash flow available to the consumer.’ This sum equals to what the company can distribute to its investors in future.

The dollar cost averaging method is another tool that can be followed by investors profitably. The method requires one to invest a certain amount of money every month or quarter over a period of time (probably during the next 12-18 months). This takes out the uncertainty out of one’s investment decisions and lowers the average purchase price of a stock as one buys them at both high and low levels.

Working out the risk-reward ratio
While investing one should look at the risk-reward ratio. If I invest a dollar at these levels what is the upside and downside. At 12,000 levels the risk of a downside was much more than 5000 levels. Since the stock markets are forward looking and move 12-18 months in advance of the actual economy, a lot of bad news has already been factorised at these price levels, giving a good chance of an upside. The markets are trading at a huge discount, for example – banking stocks which were trading at 14-16 times their book value are now trading at 1.2 to 1.5 times.

On the macro level, oil prices will bottom out at $40 per barrel and hopefully rise to $70 per barrel by Q3-Q4 of 2009. We expect the average price of oil to be around $60 per barrel. Corporate profitability will show a nominal fall as it is co-related to the GDP. At the current levels, the macro economic picture of Oman looks fine and there is nothing to get worried about. Says Buffet, “We tend to be greedy when others are fearful and fearful when others are greedy.” Probably this is the time for investors to be greedy.

As 2009 is going to be a difficult year, one’s strategy should be to focus on good shares to make money. For a start, investors should look at the performance of a country’s economy as it will have an impact on companies in the next couple of years.

Unlike earlier, when the price-earnings ratio (P/E) was the first criteria being looked at, in the current scenario I would suggest looking at the price-to-book ratio (P/B) first as it gives a clear cut understanding of a company’s worth. This gives one the comfort that one is buying a company at its book value and not at its fair value. The next step would be obviously looking at the P/E ratio and then the cash flow of the company.

Asset managers evaluate companies based on either a top-down (based on an economy) or a bottom-up model (starting from a company’s fundamentals). In a falling market a bottom’s up approach would be more suitable for retail investors. While buying a stock investors should factorise the growth of the last three quarters of that company. In 2008, the first two quarters were good and the impact of the global slowdown was visible only around the third quarter. The last quarter of 2008 and the first quarter of 2009 can serve as a guideline for the coming year.

Go for good returns
Some investors look out for stocks which give a good dividend but I am not inclined to recommend such stocks as in any investment there needs to be an element of risk, second, the growth potential of such stocks is limited. The dividend returns are marginally better than a bank’s fixed deposit and so I would suggest not to buy stocks for earning a mere dividend return.

Geographically, I see the Asian markets getting impacted to a small extent due to the size of the population of these countries. The GCC countries will also come out relatively unscathed as the price of oil will bounce back. These two regions will have a better chance of doing well in 2009 compared to other international economies like the US and Europe.

Looking back, I feel that the rise of the MSM was just too sharp, without a fundamental justification. While the MSM index will not go back to the same levels soon, investors can expect 15-20 per cent returns in 2009. We expect the markets to start climbing back from March 2009. The price of oil will continue to be an important criteria but it is unlikely that prices will go down to the level seen in the early 1990s ($10-$12 per barrel).

The banking sector is a safe bet as banks have a good cash flow with no liquidity problems. Given the global crisis it is important to check out the loans that a company has on its books as a big exposure can put additional pressure on a company. The loan should be seen in relation to the capital of a company and not just as an actual amount.

Over the next three months investors should start building a portfolio as the rally can begin as early as February 2009. The attractive valuations makes it is a good time to buy and people should refrain from selling if there is a sudden fall in the markets. One should not go by the daily fluctuations of the market and remain invested for a period of time.
 

Oman’s property and real estate industry has witnessed an unprecedented and strong growth, with real estate investments exceeding $8bn in 2008. Backed by foreign investor confidence and with a number of property projects underway across the country, real estate investments are expected to exceed $20bn by 2010. A number of these real estate developments are aimed at attracting inbound tourists to the Sultanate of Oman.

Well positioned
Despite the global credit crunch, recession, bankruptcies and redundancies, the development and maturity of the housing market will continue in Oman. The Sultanate is better placed than most of the countries in the GCC to weather the storm now. Dubai for instance has witnessed a fall in property prices to the tune of 50 per cent and above, whereas Oman has recorded only a 15 – 20 per cent drop in prices.

We expect lending norms to be relaxed, easing loan-to-value (LTV) ratios on residential mortgages. It is important to make lending facilities more favourable to people entering the property market. The lack of lending for the end-user at affordable rates and on achievable LTV ratios has dented property values and demand. As 2008 draws to a close it is difficult to forecast what will happen in 2009. However, we continue to support our views that Oman will gradually recover from the global crisis. The property market will be more stable as speculators who have driven values up to phenomenal levels, leave the market. To a large extent, they have done their job and set benchmarks in terms of property values but the end users and workers who are here for the long-haul will nurture the market, and increase values at a much slower rate and more in line with growth.

Positive news and signs of encouragement is what is required from the government and banks as this will improve things in the current situation. As money is injected into the economy, there will be a time-lag in reaping the benefits. Therefore investors should look at long term investments in such a situation. The global scale of economies and the dynamics of the property markets in each country are never or at least rarely on equilibrium paths. We expect some dark clouds lifting during 2009 but not in Q1 or Q2.
 

The year 2008 was a speculative market and there were a number of people in the market who were buying property to sell it at higher rates. These speculative values were not justified by either the developments or the end use. The market was quite active till the summer months and then there was a gradual slowdown. The speculative market that was witnessed during the period 2006 to mid 2008 has died down. As a result there has been a correction in prices (primarily amongst plots). A similar trend was witnessed in other markets where speculative values have corrected by 30 to 50 per cent. Lately a number of investors from the region started investing in real estate in Oman, but such demand too has abated.

A time to buy
In Oman there has been a 20 per cent price correction in the capital area. We believe that this is the time for serious buyers to get into the market as these prices present a once in a generation opportunity. We expect prices to move up in the next 24-30 months.

Integrated Tourism Complexes (ITCs) like the Muscat Hills Golf and Country Club are a good bet for the future. In The Wave, for instance buyers of the first phase can expect to get a rental return of 10 per cent. The second and third phase owners can expect a six per cent renal return. A combination of careful analysis and sound negotiations will help astute investors to realise some fantastic opportunities. These ITCs give buyers a chance to live within a commutable distance from the centre of the town. There have been reports that the government is not allowing new ITCs to come up till the ones which have been approved get delivered, this further enhances their appeal.

Spreading of interest
Traditionally real estate interest has centered on Muscat, but Sohar, Salalah, Duqm and Barka are also drawing interest. Sohar is seeing the development of new projects like the Saud Bahwan Palm Gardens. Oman as a whole is undergoing a big transformation -- the Muscat Expressway is expected to encourage real estate development in Muscat and Barka. As the industrial area moves out of Ghala a lot of land will become available for residential development. The Batinah rail project is expected to open up new opportunities later.

There has been a delay in a number of projects, creating a demand-supply mismatch in the residential and commercial space in Muscat. This led to a steep rise in rents and capital value of property in Muscat. Areas like CBD (Central Business District) have reached capacity and the attendant congestion is forcing companies to move out.

But with good quality properties like Janayin Sama, Talal al Khoud, Tilal Complex and Qaryat Qurm coming up things should stabilise.

Future prospects
The real estate market in Oman is expected to continue its rapid growth with analysts predicting the value of demand reaching RO8bn by 2010. For buyers looking at the international market, London promises to be a good bet. The fall in property prices and the erosion of the pound sterling has opened new vistas for high networth individuals. Central London house prices fell by 6.4 per cent during the Q3, 2008, the largest quarterly fall in the index’s history. Finally, investors should invest in real estate, keeping in mind the cyclical nature of the market and wait for the upside.
 

Since time immemorial, gold has been valued as a global currency, a commodity, an investment and simply an object of beauty. Recent years have seen a striking increase in investor interest in gold.

Does that mean it’s too late to join the gold rush? Hardly. Infact this is the ideal time to invest in the king of metals. And these days it’s easier than ever to invest in gold. Gold is considered as the world’s premier monetary and chaos hedging asset. In the past six years demand for gold has risen to 173 per cent and gold stocks have gone up by 300 per cent.

Increasing attractiveness
To put it simply, gold is becoming more desirable as the return on bonds, equities and real estate is not good enough to compensate for the risk and inflation. Experts maintain that it is the right time now, to bet on gold as an investment.

There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. A positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. The other key driver is gold’s abilities to insure against uncertainty and instability and protect against recession risk. To quote the McAlvany report, “Gold is the ultimate investment for capital preservation.”

Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 72 per cent of the demand in 2007. Out of this 55 per cent is attributable to five countries - India, Italy, Turkey, USA and China. Each of these markets is driven by a different set of socio-economic and cultural factors. Rapid demographic and other socio-economic changes in many of the key consuming nations have resulted in a favourable demand for this metal.

Markets such as India and China, where gold ownership has largely been confined to jewellery are easing barriers against investing in bullion. A combination of factors, including a weakening dollar is helping to drive gold prices higher.

The macro picture
Gold jewellery accounts for around three-quarters of the overall gold demand. In the 12 months to December 2007, this amounted to $54bn, making jewellery one of the world’s largest categories of consumer goods. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 25 per cent of demand in 2007. Generally, jewellery demand is driven by a combination of affordability and desirability by consumers, and tends to rise during periods of price stability or gradually rising prices, and declines in periods of price volatility. A steadily rising price reinforces the inherent value of gold jewellery, which is an intrinsic part of its desirability.

Gold investment can take many forms, and some investors may choose to combine two or more of these for flexibility. The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear, especially since it has always been possible to invest in bullion without actually taking physical delivery.

There are some fundamental reasons associated to investing in gold. Gold is more than just another commodity, it’s a currency. It is a currency that evolved in the marketplace over the last 5,000 years. Gold and silver are the only currencies not created and controlled by governments. All of today’s other currencies are ‘fiat’ currencies, which means they do not represent anything tangible but are only worth something due to government decree (namely legal tender laws). All fiat currencies in the past have ended up worth very little, collapsing into hyperinflation or threatening to do so. All of today’s fiat currencies have been currencies for less than 34 years (all government currencies were convertible to gold until 1971). The rate of creation of such currencies accelerated in 1995, leading to today’s worldwide bubble burst in asset prices. Returning to currencies backed by gold is practical. Even the possibility that it might happen will cause the value of gold to rise considerably. Gold is rapidly gaining as the falling US dollar continues to destroy the trust in fiat currencies.

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