Investing during turbulent times

Are we cocooned from the global credit crisis? Apparently, the UAE has more Humvees per capita than anywhere else on "Crisis Planet". One of a bag of snippets supporting the "de-coupling" argument that the oil-drenched Middle East is de-coupling from the western capital markets at such a rate as to be immune from what the West calls a "global credit crisis".

Reports suggesting robust local car sales seemingly support the "immunity theory". Who needs credit if you have wads of dirhams in your wallet and your bank queues are long because people are putting cash in rather than taking it out? If this is your rose-tinted view, you may not be seeking advice.

Or, are we temporarily insulated as economic leads have not yet caught up? Will recession, as already announced in France and Ireland and predicted further afield, hit the UAE in a domino reaction, with small property developers and real estate agents starting the job queues? I don't know. But I know some men that will have a view.

This week at The Kempinski Hotel, Financial Partners will host guest speakers from RMB International, Man Group and Arch Funds, bringing years of banking and investment insight to discuss the art of investment in turbulent times. At times of great stress, talk the situation over and get good advice. Today there is great stress: look at the market graphs in the Gulf News Benchmark section. These are turbulent times.

Run aground

Turbulent? Case study: HBOS, a previously respected bank whose value suddenly fell 50 per cent and whose price rose on Friday over 20 per cent in intra-day trading. That's turbulent. In such storms, many ships will hit the rocks. Bear Stearns, Leh-man, Merrill and the best of the puns - Northern Rock - are run aground and are in different stages of the salvage process. The environment has created a massive loss of confidence in the global financial system, and more specifically the western one.

Why should you seek expert advice? This article is for those only just entering the process of appreciating that what we are experiencing is certainly historical and potentially life-changing. There is a problem. There is a solution (eventually) and there are things you must consider as an investor/saver.

The problem: We have a severe crisis of confidence in the world of lending. If banks do not take from one source and lend to another, they are not banking. If banks do not lend, who does? Nutshell economics: a number of banks are over-extended and are in dire need of capital and deposits to such an extent that they are not lending to each other. Whilst sovereign wealth funds (SWFs) may have picked up the first wave of capital-requests, it has been left to "the lender of last resort" in the US and Europe to bail out their domestic lenders.

If not sorted, there will be an inevitable knock-on effect for companies and individuals unable to borrow. Equity markets are the first to pick this up with share values sliding, which in turn are the harbinger of what the Americans refer to as Wall Street entering Main Street (the High Street). Unsorted, the entire capitalist era is threatened, or as an American car-sticker said: "the end of an error"!!!

The solution: Undoing the lending error isn't conceptually complicated. Although the inquest on how the banking system deals with re-regulation might be. The guardians of the "don't put your eggs in one basket" rule managed to allow some investment banks to put most of their breakfast into one basket.

But, other than refining regulation, the immediate needs are likely to revolve around restoring confidence into the banking system, bringing back the value-add of banking, getting rid of bank debt and dropping interest rates to make lending cheaper. All of this takes significant amount of time to organise and take effect. The point - this isn't the end of the world; just the end of a system of management.

Options

What action should investors take? Ultimately, a different issue for different investors, amounting to each individual approach to two things: value and timescale.

When is the money required as cash and for what purpose? With that established, it should be easier to distinguish between investment decisions made for short-term purposes - where cash in these circumstances must now be king. Or, for medium- to long-term purposes, where current asset prices might suggest significant medium term value. Take the likes of Warren Buffett, who says "the US economy is flat on its back"; yet this has not prevented him from buying significant assets. On the contrary, this contrarian thinker freq-uently takes advantage of market downturns. For his long term positions - current equity values are "opportunities". Ditto for Banco Santander - a banking aggressor who see nothing but opportunity in the current lending crisis.

It is the most turbulent of times. That's for sure. It's not certain how this might impact on your ability to maintain your Humvee. It's not certain that global "western events" are certain to impact on local matters. The uncertainty is such that good insight is at a premium. Opportunity and threat in turbulent times - a pressing matter for everyone.

- The writer is chairman of Mondial Financial Partners.