After the convulsions of last month, the thought of investing in the equity markets might be considered counter-intuitive. Hundreds of billions of dirhams worldwide have been wiped from shares after repeated plunges in the market caused by the ongoing credit crunch, leading to a string of bank collapses and nationalisations. On the surface, it may seem insane to be diving back into the market at this point, but given that many supposedly low-risk investments appear dodgy, and that some are paying zero per cent interest, buying selected stocks at what may be the bottom of the market may make sense, particularly if you are planning to build a long-term portfolio.
The legendary stock investor Warren Buffett, dubbed the "Sage of Omaha" for his canny investing strategy, is a firm believer in buying at times when others keep their hands in their pockets. "Be fearful when others are greedy, and greedy when others are fearful," he said. It is hard to imagine a time in the last 70 years when equity investors have been less confident than now. However, Mr Buffett has pumped US$5 billion (Dh18.4bn) into Goldman Sachs, and is putting a further $3bn into General Electric.
Should we be following him? And if so: which sectors, regions and markets should cash be pumped into? For UAE residents, the GCC would be the logical place to invest. This year, GCC stock markets have fallen by huge amounts, but the drops have not been hugely discriminating between sectors and companies, which means many underpriced firms are available. Ali Khan, the executive director of the investment bank Arqaam Capital, said that telecommunication companies were the most resilient stocks in which to invest, and their third quarter earnings reported later this month were expected to push up their prices.
"Telcos are what analysts are suggesting are the more defensive players. They will face less of a slowdown because people still have to make phone calls," he said. However, he thinks people should be cautious about which stock they pick, even though earnings growth is resilient. For example, some GCC telcos have investments in companies in Pakistan, whose earnings could be affected by the fragile political situation.
Mr Khan said that before making decisions, investors should look at the fundamentals of companies, such as cash balances and price-to-book ratios. In addition, he recommends investing in Saudi banks. While banks are seen as no-go areas at the moment, he believes those in Saudi Arabia are severely underpriced because the Tadawul index as a whole has been falling heavily all year. "They shouldn't be put in the same league as western banks. They have relatively controlled exposure to the international scene and are well capitalised," he said.
Faisal Hassan, the head of research at Global Investment House, said select banks were worth investing in, especially in the Islamic banking sector. GCC investments will always come back to two key factors - property and oil. If the oil price does not decline too much, the funds for large-scale government infrastructure projects, which have been one of the region's main drivers of growth, are likely to continue.
According to Mohammed Salih al Hashemi, the executive director of asset management at the Abu Dhabi Investment Company, firms involved with infrastructure projects, such as building and parts suppliers, are the ones to aim for, since they will tend to continue benefiting from the projects' largesse even through turbulent times. "You also have a lot of private companies who supply materials to such projects, so they tend to be the beneficiaries and are insulated from the problems that may engulf those involved with private-sector real estate," he said.
In addition, another sector that may be seen as relatively immune from the international crunch would be food producers and suppliers; not at the high end, but the dairy and meat farmers who supply the essentials to shops and markets. They are worth investing in for the simple reason that such products do not suffer from the sharp rises and falls in demand as other industries. "In this region you don't have the depth of food production and suppliers that you have in the West, so you can't choose from as many different retailing companies," he said. "These producers and retailers are defensive. Recession or no recession, people still have to eat."
Mr Hashemi said middle eastern pharmaceutical companies were a good bet. Many are not like western pharma-giants with large research and development budgets, but generally produce generic drugs, which is not necessarily a bad thing as they operate without those costs. For those who would prefer to invest abroad, the US and Asia look the best bet. Bill Davey, a senior consultant at financial advisers Mondial in Dubai, has been advising clients in recent weeks and months to buy US equity.
"The USA has a tremendous ability and history of rebounding from shocks like the one we are seeing," he said. "In addition, Asian markets have been strong, but the potential there for growth is so great." Mr Davey did not advise making long-term European investments, however, because of the region's perceived inertia and lack of dynamism compared with the US. But whatever you decide, it is worth heeding the advice of Warren Buffett.
"Invest in a company that even an idiot could run," Mr Buffett said. "Because one day an idiot will end up running it." firstname.lastname@example.org