Gulf investors are facing a different economic cycle to the one enjoyed after the global financial crisis
How to bulletproof your portfolio against the new bear market
It now appears that January 26 was a major high in US stock markets with the S&P 500 finally topping out at 2,872, up from its previous low of 666 set on March 6 2009, the so-called devil’s bottom.
The huge swings in share prices seen around the world since January are also typical of topping action. Volatility is back with a vengeance after a couple of years of almost vertically ascending stocks.
As the months have passed, the chances of this proving to be a momentary aberration - some kind of a blip in the long bull market - have become lower and lower.
Economic Cycle Research Institute chief operating officer, Lakshman Achuthan, says the US economy started slowing last autumn. Guggenheim investment head Scott Minerd warns the market is on a ‘collision course with disaster’ with a recession next year and a 40 per cent crash in stock values.
A trade war with China is another big worry. But the real gorilla in the front room is the scale of the overvaluation in this long bull market for US equities, now exceeding that witnessed before the Great Crash of 1929 on some metrics.
What goes up must come down. The law of gravity cannot be suspended, merely postponed.
For Gulf investors this will create a very different economic climate to the one enjoyed in the post global financial crisis era. Indeed, it may at times feel more like 2008 to 2009 than any other recent experience.
You don’t need to look far to find evidence of the slowdown here, as well as in Western financial markets.
Since the New Year there has been a sharp reduction in the Purchase Manager’s Index in the UAE, though it remains in positive territory, partly due to the introduction of VAT.
Meanwhile the Dubai real estate sector has been hit with a 46 per cent drop in off-plan sales by value in the first quarter, and a 24 per cent decline in previously owned resales, according to data from consultant Reidin-GCP. Blame a risk-off market and oversupply.
Trade has been broadly flat while tourism and aviation remains a bright spot. The Dubai Financial Market is down almost 10 per cent year-to-date.
Emaar Properties founder Mohammed Alabbar has warned realtors to be careful of taking on too much debt and expressed his fears about the business outlook for 2019.
So how should savvy investors behave in such circumstances?
Sticking your head in the sand and waiting for the coming storm to pass is one approach. However, even if you are cash-rich and debt-free this inaction is unlikely to be the most successful strategy.
I would be particularly concerned if I had all my savings into tracker funds at this stage. These passive investment vehicles have behaved wonderfully well in the past decade - even beating Warren Buffett’s Berkshire Hathaway. But they will now faithfully follow the market down as per their prospectus.
Do you really want to see your savings plunge 40 per cent or so? The main issue is just how long it might take for this savings pot to recover in value.
Remember how after the dot-com crash in the year 2000 it took 17 years for the Nasdaq to get back to its old high. That’s what happens when market valuations become really over-inflated.
Therefore, at the very least please consider whether you have money tied up that you will need in the next few years. If so, why not get it out of the market while it is only 10 to 15 per cent down?
Holding cash for a period in any financial storm is a comfortable safe haven.
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It’s also worth looking at US treasuries, or even locally issued UAE bonds. Sure just about everybody is against bonds now because interest rates are supposed to be on the up and up.
But will those rate rises actually now happen if the stock market falls get bigger? Cutting rates is the standard medicine for avoiding an economic slump after a stock market crash.
This time may be no different and 10-year yields have actually been trending lower recently, despite the last Fed rate hike.
Only the boldest contrarian would buy treasuries now, but the very fact that nobody is doing so might suggest this trade is now too one sided.
I recall how in the recovery from the financial crisis, it was Dubai bonds where local investors first scored a hit, before going on to buy into the real estate upturn and, years later, local stocks.
But do you really want to hold the US dollar now and its local proxy the UAE dirham? The dollar does look a busted flush and on the way down from its decade-plus high of two years ago.
It might be more prudent to also diversify your currency holdings.
The classic safe haven currencies are the Swiss franc and the Japanese yen, but Eastern European currencies might also be worth considering.
Italian investment bank UniCredit ranked the Czech Republic and Hungary as the European countries set for the highest GDP growth this year of around 4.5 per cent, and both still have currencies independent of the euro.
Multicurrency online accounts like www.swissquote.ae make this an easy way to spread your risk.
Apart from going into cash, the other classic reaction to bear stock markets is to short-sell individual stocks or indexes. Tesla is the most widely shorted US stock today. Shorting means that you make money as the value of a share falls.
However, I have lost money in the past trying to short the stock market indexes with ETF products and would advise against it: you really have to be unnaturally accurate in your forecasting to get these instruments to go up and not down.
Finally, even a modest holding of precious metals is likely to prove a good investment in unstable financial markets. Gold has been a great hedge so far this year and still trades well below its 2011 high.
Silver is lagging behind gold and some say it is primed for a huge rally against the general trend in major asset markets. Bitcoin and the other cryptocurrencies I would avoid like the plague.
Peter Cooper has been writing about finance in the Gulf for more than 20 years