Reaping rewards is all about timing

If the Eurozone is on the brink, then Gulf investors have not only the stock market, but also currency exposure to be concerned about.

They might be fearful, or they might already be positioning for whatever opportunities come along amid the potential wreckage.

Getting your rewards in investing can be very much about timing. Often even those who manage to anticipate the next trend either way may act prematurely, hoping not to be caught out when that move actually occurs.

Expecting a bull market, because they sense gloom has been overdone and the tide is about to turn, they're buying too soon, catching the so-called falling knife as prices drop sharply further. That's nasty.

Expecting a bear market, equally they ditch their stocks well in time to lock in gains, and then discover they have spiked even further upwards, and the potential for some outstanding returns has been sliced off. That's not especially funny either.

Of course, the nearer the point of inflexion, the bigger the risk, which is the counterpart of the rewards mentioned. You may be right in guessing what's ahead, but are you astute or lucky enough in picking your moment, and how determined are you to take that chance?

Exaggerated moves

It's another galling fact that the most exaggerated moves in the market are often those just prior to the turn. Also, the price action on the downside tends to be greater in effect than near the peak, as a simple function of the absolute numbers relative to the base (Dh10 means more in percentage terms when the price is low than when it's high).

So the temptation to wait as long as possible is definitely there. For short-term investors, it's a key consideration. In essence, the trick is not so much to time what the market perhaps should be doing, but what its participants will actually do, which, since everyone is in that same boat, makes it a very self-referential and almost surreal game.

For longer-term investors, it's just another factor in the mix of their decisions. Experience tells them not to try to time their move precisely, but merely to be right enough often enough about what happens next, whenever that is — and over their timeframe: to play the percentages, and accept that they will probably miss out on the lucrative, speculative froth.

Thus, the central issue is not the rationality or otherwise of the market, but, as Daniel Egan, head of investment philosophy of Barclays Wealth notes in the May 2012 edition of Compass, how you personally address it.

All that comes to mind now, with the markets both reflecting and discounting the trouble in store, particularly for Europe — and especially wondering whether the euro can hold together.

Clearly an extraordinary danger presents itself. There are, in a nutshell, huge issues in terms of the scale of the associated financial support, arguments about policy direction, and potential contagion to be reckoned with, likely to test the Eurozone system to its limits even if it doesn't actually fail.

Markets which have shown some fear in recent weeks might well develop a panic.

On the foreign exchange (FX) market, some of the same principles apply, although commercial flows are relevant too.

Currencies market

Naturally, the euro has been tumbling for a while already. Its key counterpart, the US dollar, has its own issues, as indeed do many paper currencies. Gold remains in the frame in any case, as noted by Mark Mcfarland in his client note for Emirates NBD last week.

Discussing FX forecasting with another source last week, I was told that projections tend to be closely aligned to current exchange rates, and therefore appear unremarkable. I pondered whether that might be an indication of market efficiency or simply the herd instinct (otherwise known as safety in numbers), knowing that those in the financial world have something of a vested interest in not veering too far from the crowd.

Philip Hubbard, director of Consensus Economics, an economic survey and research firm in London, offered their latest finding for the dollar/euro on a 12-month horizon, namely $1.288, as predicted by a sample of around 200 contributors (see box). That's not a million miles from the prevailing figure at the time of writing.

Earlier this month, $1.29 was reported for one year out from the latest Reuters monthly poll of some 60 strategists. Gulf investors might feel, consequently, that stocks instead are the key component of their portfolio sensitivities.

Forex forecasts

Besides monitoring key economic variables, Consensus Economics produces monthly surveys of forex forecasts out to two years (see table). Philip Hubbard, director, advises: "They are all remarkably similar, but mask a differential between forecasters." For the 1-year figure that ranges from $1.45 to the euro to $1.15, roughly a 20-25 per cent spread. A normal bell-shaped distribution (standard deviation) shows nearly two-thirds of the data within 0.075 cents of $1.288.