Value investors can ride over short-term volatility through cashflow oriented asset picks. The UAE does offer a few options. Image Credit: Shutterstock

After dominating headlines for more than a year, luxury real estate has started to fall and houses are sitting on the markets for longer. Developers are starting to offer hefty discounts on new launches, and this trend is starting to move into the midmarket segment.

As the stomach churning volatility in the world markets starts to sink in, greed is giving way to fear and the natural response is one of risk aversion, moving to cash until markets start to stabilize. Private bankers are rewriting questionnaires on risk tolerance levels and reframing portfolios accordingly. Should investors pay heed to these instincts?

Study after study reach the same conclusion - that cash is the worst asset class. We know this from recent experience as well, given the inflationary forces at work. With household budgets being strained, asset price falls are deepening risk aversion sentiments regardless of the country considered for investment.

Living with asset volatility

We know of two dynamics that are at play: 1) asset volatility continues to rise and 2) the UAE is offering a plethora of investment alternatives that range from conservative cashflow oriented investing to the more opportunistic kind. From this starting point, viewpoints start to diverge.

In the dialogue between investors and advisors, there is this belief that price volatility - whether in real estate or in the capital markets - is the demon that must be defeated. Curiously, this overall objective leads to greater portfolio turnover, thereby increasing transactional costs and reducing overall returns.

Business-oriented investors (otherwise known as value investors) conversely do not attempt to shield themselves from such asset volatility. Rather, the objective is to maintain the process of wealth generation through the simple starting precepts of a) low turnover, cash-flow generating assets and 2) recognizing that economic value added through simple compounding makes any short-term volatility an afterthought.

Bargain buys

Cash has the worst ‘store of value’ - that much we can all agree on. However, when we value assets, we use valuation models and from a business owner perspective, that valuation has to include the returns and/or the payback that will be derived from the investment. From that perspective, UAE assets remain a bargain, even after the selloffs in Western markets.

The point that needs to be arrived at is where expatriate investors, faced with the choice of whether to repatriate their monies back home or consider investing in the UAE, increasingly choose the latter option. Selloffs or sluggish performances become a reason to buy under this paradigm. This change of thinking can only occur when investors focus on value generation, rather than market timing.

Low turnover is good

The high priests of modern finance have been trying for decades to discard the value investors who run low turnover portfolios (whether real estate or capital markets), claiming that their performance is an anomaly. Looking back, we have seen this before, during bear markets run in 1973-76, in 1987, 2001 and 2007.

Every single time, the dominant paradigm was encourage higher and higher frequency trading. What we know is that in every instance, investors who did not think of portfolios with a charge to defeat volatility but rather to outwit it, through a combination of steady cashflow returns and with a business-oriented mindset won the day.

Whether they end up with diversified portfolios or not, one thing is certain: Dubai and the UAE are firmly on the radar for capital deployment. This impulse needs to be nurtured.