The best contrarian investment opportunities this Autumn
From real estate or property stocks in Dubai to gold and Russian equities, Peter Cooper unearths the assets other investors will ignore
In theory being a contrarian investor is simple enough. You look to buy valuable assets when they are temporarily out of favour for some temporary reason and get them cheap.
Then you wait until everybody else has decided to do the same thing and sell. That’s what I did in Dubai, starting a dot-com after the crash of 2000 and selling out before the global financial crisis.
It was the same story buying Dubai property after that same crash brought the local real estate sector to its knees.
True this approach to investing is not for the faint hearted or those with a very short-term view, and you need to be particularly careful if it involves any borrowed money because it often takes a bit longer than you expect. But it does work.
Buying cheap and selling expensive always does, if you can achieve it.
Pessimists say that at the moment global stock markets are hugely overvalued and ready for a crash, and they are probably right. Likewise US interest rates are shifting up and that puts the massive global bond markets in peril as well as real estate where debt is a main market driver.
However, contrarians always look for the other side of the coin. Something is always being overlooked or just in a different phase of the market cycle between being cheap and overvalued.
So where are the contrarians looking today?
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As a UAE-based investor I am far more optimistic about local prospects than many other analysts. I’ve noticed in the past that the oil price drives the local economy, both as a business hub for the Middle East oil producers and Abu Dhabi as a major producer itself.
Last week Brent crude was almost $60, more than double where it was two years ago. At the same time, and the two are somewhat linked, the US dollar has depreciated significantly over the past year.
That’s a double bonus for the UAE: a higher cash flow and local business revenues and a cheaper currency for the tourism and aviation sectors.
Because the UAE is around 80 per cent expatriate, this has a particularly powerful leveraged effect on demand in other sectors like real estate. As business expands, it employs more people and they have to live somewhere.
We saw this most dramatically in the recovery from the 2008 to 2011 recession. The turnaround, when it came, quickly filled up swathes of new property and developers soon could not keep up with demand again.
Now the business slowdown of the past few years has not been anything like as dramatic as the 2008 boom-to-bust, so the recovery should be even quicker and stronger.
So is it a good time to buy a villa or apartment in Dubai then? Yes, this would appear to be the bottom of a classic three-year property cycle. Of course you will always have Cassandras telling you about 35 per cent vacancy rates in some communities and predicting worse to come.
But that only reflects the past bad business period and not necessarily the future outlook. The opportunity is that you have plenty of choice at cheap prices and you won’t have that when the market has recovered, and it always does.
If you don’t want the commitment of owning a property then buying the major property stocks is a good proxy, with Emaar the obvious standout stock pick with low debt and best-in-class management.
Elsewhere contrarians are struggling to find opportunities because a long period of low interest rates has forced asset valuations to record heights. But this is not always the case.
US stocks selling on a Cape-Shiller adjusted price-to-earnings ratio of 31 are awesomely expensive, trading at levels only ever seen just before the crashes of 1929 and 2000.
Then again consider Russia, only rated at just under seven. Professor Robert Shiller, who co-created this index, says he is thinking about buying Russia at these levels, although notes that this market could still go a bit lower. The ruble is also very low.
Russia is after all a major energy producer and stands to gain from the same upswing I’ve just forecast for the UAE. I was surprised recently to find that Europe’s tallest three buildings are not in London but Moscow after recent skyscraper completions.
Jim Rogers, the multi-millionaire contrarian investor who spotted the commodities boom of the 2000s before anybody else, is a big bull on Russia.
Nearby Central Europe is also still a great place to invest if you can find the right vehicle. Countries like Poland, Romania, Hungary and the Czech Republic are all pursuing low-tax, business-friendly policies that are attracting increasing foreign investment and have double the average EU GDP growth.
Assets like property in Central Europe are well below prices in the ‘more advanced’ economies of Western Europe. Plus if you are a dollar or dirham investor then the euro also has more upside as the pendulum continues to swing as I correctly predicted in this column a year ago.
Finally, I must add gold to this list of contrarian plays. Ray Dalio, one of the most successful hedge fund managers of all time, is currently recommending that every investor should have 5 to 10 per cent of their assets in gold.
Gold has performed very well this year but prices still languish below recent highs of 2011. Mr. Dalio thinks global political risk alone is sufficient reason to own gold. Think North Korea, Iran, Syria, Ukraine.
Mr Dalio was one of the few hedge fund managers to accurately predict the last global financial crisis, made his best-ever bets then and currently has a personal net worth of about $17 billion.
If every investor was to take his advice and make this asset allocation then it would be a self-fulfilling prophesy as the supply of gold is relatively fixed so the price would take a big jump.
Not every contrarian prediction is a winner. But over the years this has played out well for me, even if patience has also been required because it always seems to take much longer than you expect.
Peter Cooper has been writing about finance in the Gulf for over 20 years
Updated: October 1, 2017 04:07 PM