Picking UAE stocks that can withstand global markets’ tariff whiplash

In any investment course that is taught, one of the first issues scrutinized is that of ‘opportunity cost’.

Beyond that, what’s focused on (rightly so) are the variables of each business that have predictability. If something is not very predictable, then it becomes impossible to evaluate. This is the same issue confronted with when making a decision for purchasing a house - the opportunity costs involved and how predictable the investment is.

In Dubai - as is the case around the world - the vast majority of investments for real estate revolve around individually selecting a house or apartment, whether to live in or to invest. Because, in the end, people figure out what they are getting themselves into and feel strongly about it.  

In the capital markets, this system of decision-making has gone awry, where diversification is advocated.

Diversification, as practiced generally, makes very little sense for anyone who knows what they’re doing. It is protection against ignorance - if you want to make sure nothing bad happens to you relative to the market, then the best way is to own everything.

This only makes sense if you do not know how to value or analyze businesses. Notice the discrepancy in recommendations for capital markets and real estate markets here.

In real estate, the focus is to get a grasp of the investment. In capital markets it’s about achieving average performance. There was a bizarre occurrence in an investment conference recently where an investor recommended buying physical parking spaces in Dubai instead of Parkin’s stock.

This makes no sense to any thinking investor.

Amidst the cacophony, what is lost is that it is crazy to own 30-40 stocks, on the pretext of ignorance.

But we have to deal with ‘noise’ and incredible uncertainty (as the tariff tsunami has recently shown).

Here, what we can see is that regardless of all the second order effects, tariffs are ultimately a tax that will prove to be inflationary in the general economy. But there are wonderful businesses that are exempt from this deleterious effect, and in fact, will profit from such a scenario.

These include well-known names such as Salik, Parkin, Dubai Taxi, Dewa, Empower, and PureHealth. On a second order level, even companies like Lulu and Burjeel that have suffered in price because of their higher input costs but which will be offset by their superior distribution chains.

These companies at their core have an investment and cash flow engine that is primed for the vey sort of inflation protection that investors now crave. Furthermore, their level of predictability is not predicated on any fancy “spin” at investor presentations.

It is no surprise that most of them have handily beaten market averages and attracted higher pools of capital. But that is not the lesson; for there will be periods when these companies will underperform in terms of their stock prices.

This means that in market situations where investors have lost their heads is an opportunity for those to capitalize on such bargains. At its simplest, any level of analysis is about the marginal rates of return on capital. And there are a number of companies that meet this criteria. (Note the recent frenzy of attention for district cooling assets by foreign asset managers).

What investors need to understand is that they do not need to churn portfolios, nor do they need a high number of ideas every year. All they need in order to achieve the proverbial investment heaven is to identify a few good ideas that they can understand and then let the business speak for itself.

As we enter earnings season, there will undoubtedly be buybacks that will be announced by some of the companies. Investors should largely ignore such announcements as signals to buy or sell. Rather, they should focus on Einstein’s maxim: “Everything should be made as simple as possible, but no more simple…”