Once a path of increasing interest rates is embarked upon by global central banks, it is entirely predictable that equity (and real estate) valuations will start to moderate and then compress. What is impossible to know is exactly when.
The self-perpetuating process by which valuations move higher, now goes into reverse. In both cases, the herd mentality is acting as strongly as ever. Retail investors, long used to taking oracular pieces of wisdom with a grain of salt, are even more bewildered by the array of choice they have, regardless of whatever market they are investing in.
The ‘expert’ has moved from guiding financial institutions to becoming a beacon on the local radio business program. this is potentially dangerous because It is impossible to give the same amount of detail in context or tone. So, armed with skepticism, they continue to ask about the viability of investing in the next IPO or the next real estate launch, especially when things look increasingly dour back home (wherever home is).
Always chasing next big thing
The last few decades led to the rise of the entrepreneur in a way that was unprecedented. In response to capital being thrown everywhere, the motto was a) to expand as fast as you can, however you can and b) every failure was another stepping stone to success. The media played its role in the shaping of this zeitgeist and everyone was encouraged to take a flier, on anything that mattered (or didn’t).
In between, the bust cycles that occurred as a result of rising interest rates and/or market failure led to a temporary exodus out of these speculative investments and into something more tangible. (It is convenient how people seem to discover the need for their investments to be about ‘something real’ only after the money dries up).
Each time, however, the trend reversed into increasingly greater needs of technology. What the data shows, is that these tech innovations, for the most part, have not yielded profits in any way close to the increase in valuations that have occurred. This is not new.
Airline stocks, (once considered to be at the edge of innovation) have generally been terrible for investors (the UAE may well prove itself to be an exception in this field). Yet, no one argues that they are bad for society. Investing is about profitability; we may tolerate higher rates of losses given the opportunity cost that we may have. In the end, both the retail and the sophisticated investor converges on the need to be able to make a return.
Debunk past ways
Investment banking and analyst reports publish their new and improved research on the future. Unsurprisingly, it debunks everything that it was saying in the last few years. In doing so, it makes a series of points without intending to: 1) the feeling of fantastic possibility that technology entails moves at a slower pace than what its fan boys seem to indicate and 2) capital and cashflow (whether in short supply or plentiful) is the oxygen for business growth and investing.
This is one of the contexts that retail investors need to assess the recent IPOs that are coming their way, especially in an era of high inflation. There is this sense that investment bankers in the Middle East have created this hullabaloo over dividends and that cashflow and profitability may be overrated.
A wealth of financial data contradicts this, and a sane capital market functions optimally when it allocates slightly less to the riskier ventures and more to the ones that are cash cows with growth potential baked in. This is the era that we have once again entered in Dubai.
For those who have and are seeing this, the shift is easier, both in the capital as well as in the real estate markets as the emphasis on cashflows moves to the forefront.