Valuations exert negative pressure

Arab Spring, Strait of Hormuz, Iraqi Sectarianism; with the common denominator in these topics being the so-called influence of external state actors. If this line engulfed you in short-term and recurring deja vu, as it is plastered on virtually every other article written in today's mainstream media, then you are in to make some money.

All this news forms a conceptual collation of geopolitical risks currently evident in the region. The market discounts downside potential imminently in today's globalised framework of financial markets.

For example, as you get geographically closer to the Federal Reserve, the respective financial markets are faster in digesting and discounting market information (from minutes to weeks).

Essentially, local market prices witnessed during January may well have discounted the worst scenario(s), collectively, already.

Inside information

This paves way for a glimpse of the hardest yet most profitable trading strategies: that of the so-called ‘contrarian' investor.

You had probably heard stories of investors (or an investor in singular terms) who had made a killing shorting sub-prime mortgages at the peak of the market bubble a few years ago — keep in mind the infamous investor(s) in this case did gain from inside information and evaporation of Chinese walls.

Another is that of the investors who sold off UAE equities in 2005 (the peak) who admittedly did not have such information but rather something closer to the natural contrarian investor: a natural trading outlook.

Unlike regional executives, who show off their conglomerates' accounts via asset revaluation gains and then turn back to restructure a year down the line due to cash and credit constraints, the natural trader only assumes his/her assets have increased in price once they have realised the gains by selling the securities — this is not taught in mainstream academia.

Now, what about the investor who bought during the bottom of the UAE market? Well, there isn't one we remember imminently, and that is a clear preliminary signal of a contrarian trade evolving!

Furthermore, what bottom, may you ask? The fact that a bottom hasn't been discovered yet regionally reaffirms the pot of gold at the end of this tunnel: the potential that we may be undergoing a bottoming formation.

Fear at its peak

More critical to this passage is the contrarian notion: when bad news is all over the place, it simply means that fear is at its peak. Fear distracts your attention away from your subconscious as the illusion of ‘blood in the market' brings you in with the herd. One must always detach him or herself from the market makers' comfortable façade or ‘market illusions' as I call it in order to grasp what is going in ‘value wise'.

By value-wise I refer to the numbers that are behind the numbers you see on the ticker, and this is the single most important element in successful investment management.

If you had done that with the blue-chips in 2009, for example, purchasing either Emaar, Aramex or Arabtec during their lows, you would now approximately be 60 per cent, 160 per cent and 220 per cent richer, respectively — that is if you sell and realise the gains. Rightfully so, the only time to refer to the price ticker, enriched with emotions, is when you are rejoicing a sale!

Redeployment

In the UAE, excess valuations might at a point of time been supported by fundamentals, hence the drop in the market towards more reasonable levels in 2007. However, the windfall profits retained during the boom years were then redeployed, and at times, with additional help of Uncle Sam-led debt syndications.

This was the big disaster as cash was allocated with absolutely no attention to global best practices in the field of asset allocation, let alone more indepth delta-neutral securitisation add-ons.

Besides, further debt was piled onto the cash misallocation(s).

The writer is manager, Asset Management and Product Development, Dubai Bank. Opinions expressed here are his own and do not reflect those of his organisation or Gulf News.