x Abu Dhabi, UAEWednesday 26 July 2017

Now is the time to take the contrarian stance

The euro zone is cracking, going from bad to worse, driving global markets in one direction - down - as fear and negative sentiment take control of investors.

A motorist drives next a graffiti, in central Athens. Greece held crucial elections on June 17. (AP Photo/Petros Giannakouris)
A motorist drives next a graffiti, in central Athens. Greece held crucial elections on June 17. (AP Photo/Petros Giannakouris)

Musa Haddad

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful" - so said Warren Buffett.

The euro zone is cracking, going from bad to worse, driving global markets in one direction - down - as fear and negative sentiment take control of investors.

With dark clouds hovering around almost all asset classes and headlines announcing the death of the financial markets, leading to a sell-off erasing all gains made since the beginning of the year, and with the S&P 500 Index ending last month down 9 per cent, the Euro-Stoxx 50 down 10 per cent, along with indexes in Germany, China and Hong Kong down by similar amounts and, in addition, Brent down 17.5 per cent, all the signs are there that markets have already priced this in.

Whether Greece defaults or a makes an exit from the euro zone, it seems the world had already prepared for disaster.

Another reason that puts us in a position for being contrarily bullish is the VIX (Volatility Index), also known as the "fear index". The index measures expectations of volatility, or fluctuations in price, of the S&P 500. Higher values for the VIX indicate investors expect the value of the S&P 500 to fluctuate wildly in the next 30 days.

As investors worry about a possible hit to the euro zone if Greece defaults, the VIX reading should be trading above the 30 to 40 levels at least, but while writing this article the reading was below the 25-level - near the lower end of the range. The VIX continues to move lower, as if the euro-zone crisis is not as volatile as people think and the various crises might be in the process of being resolved.

The index hit a historic high of 89.53 on October 24, 2008, on concerns about the global financial crisis. Before this, the index had peaked at 38 on August 8, 2002.

Such reasons as outlined give us the confidence that the recent declines we have seen in the Middle East and North Africa, particularly in Saudi Arabia, due to fear of what is happening globally, are set to be reversed.

Given the number of market analysts being bearish, it is quite likely the market is approaching an oversold condition and a reversal in trend may be forthcoming.

The majority can be right for much longer than many think, but when it is wrong, it is often badly wrong and this usually occurs at critical market turning points.

The Dubai Financial Market General Index is trading at historical lows and we see the trading zone of between 1,400 and 1,500 points, considered a low-risk accumulation zone for intermediate and long-term investors.

As for those with the short- term trading duration, they are much better staying on the sidelines until volatility starts to rise.As for the Saudi stock market, it suffered heavy falls this month as investors entered into panic-selling.

But, in my view, there will be a much faster move in the opposite direction - a similar move occurred on the S&P 500 on June 1 before a strong upside reversal.

Musa Haddad is the head of investment advisory services at the asset-management group at the National Bank of Abu Dhabi. The views expressed are his own and not necessarily those of the bank

business@thenational.ae

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