Weighing risk and rewards to reap the best outcome

The start of the year has witnessed changing market dynamics with “lower for longer” oil price and higher volatility in capital and debt markets, leading to erosion of equity gains from the previous bullish run. For US equities, 2016 begun as one of the worst years on record with S&P 500 losing in excess of US $1.4 Trillion in the first 10 trading days. This performance was primarily led by the turbulent Chinese data which went on impacting the materials, financials and technology companies. Although markets recovered some of January’s losses, the volatility in financial markets continues to be high with analysts keeping a close eye on oil prices as well as on emerging markets and China, in particular.

There is an emergence of concern among the local businessmen regarding the pegging of the local currencies with the US dollar. The general consensus in the region is that the dollar will strengthen and that there will be some disadvantage here for exporting goods to non-dollar countries, such as Europe and Asia. In the region businesses’ are being more cautious while banks are reassessing their risk appetite as they deal with a situation of gradual liquidity erosion. Low oil prices have led to tightening of liquidity. Hence the High Net Worth Individuals (HNWI) who are largely business oriented are reassessing their portfolios in the wake of lower credit availability and adopting a ‘wait and watch’ approach.

Market Advantages and Options

Due to the steep fall in price of equities and fixed income securities, there are a number of opportunities for investors to enter the capital markets and get higher returns than deposits. Prices in the Sukuk space have become attractive and there are some good picks available for a customer who can take a long term position to earn a high single digit or double digit return without the need to leverage their portfolios. This also allows the client to avoid the risk of running a margin call while they continue to enjoy higher yields even once the market stabilises. Another good option for investors currently is to get into capital protected structured products, which protects their principal upon maturity. While there might be a minor limitation on their profit, investors would be able to participate in the markets without risking their capital, hence preserving their wealth.

Wealth managers should, as always, have a continued dialogue with their clients and demonstrate their value as a trusted adviser — by guiding them especially during these volatile times. Investors need to be continuously reassured that someone is actively looking after their investment portfolios and keeping them updated about any market developments.

Investing cautiously

As a basic principal of investing, it’s prudent to stay aligned to one’s recommended asset allocation model, in line with their risk profile and achieve the benefits of diversification. Clients should exercise caution while investing and stagger their investible portfolios in order to achieve the ‘Dollar Cost Advantage’ and benefit from any further downside while they continue to lock the higher yields at every entry point of their investments.

Most investors today are not comfortable participating in the equity markets. However, in cases where they do, it is advisable to go through the mutual fund route and benefit from professional expertise of fund management. For example, European equities can be a good buy at these valuations and we at Noor Bank, have launched the Noor Sustainable Shari’a European Equities Linked structured deposits, which allows investors to participate in European equities without risking their capital while they receive a minimum assured return.

Though the emerging markets have witnessed more volatility and substantial international portfolio money has been pulled out, including in India and China, there are pockets of good picks which are now available for investors to benefit from the lower valuations.

There is also some interest around gold. It is often mentioned as an asset class that is a ‘safe haven’. Historically, gold has had an inverse correlation with US Dollar; albeit in the recent past, it has not been a perfect inverse correlation. Though the markets have been negative and gold has gone up since the start of the year, the headwinds gold could face in 2016 is a continued fall in global inflation or a greater-than-expected increase in profit rates in the US, while the possibility remains remote.

Recent data from the World Gold Council (WGC) highlights a modest increase in gold purchases driven by both jewellery and investment demand as compared to last year. Central banks have also increased gold purchases. Nevertheless, for a long-term investor, gold prices are at a 35% discount from the peaks seen 3 to 4 years ago. While these trends suggest a mild improvement in the outlook for gold, tactically, a careful approach to purchasing is recommended as it may still be early to expect a meaningful rebound.

Going forward, while it is important to be cautious, investors should always weigh acceptable risk and expected rewards to reap the best benefits.

The writer is the Head of Priority Banking, Noor Bank. The opinion expressed here is his own and does not necessarily reflect that of Noor Bank or the newspaper.