The tremors felt across global capital markets on account of high interest rates and uncertainty about China’s economic recovery have not deterred UAE retail investors from capitalizing on lucrative opportunities in the local and global markets.
The key to devising a good investment strategy is to diversify the portfolio and practice sound risk management.
Bonds and treasury bills
The environment of higher interest rates has enhanced the appeal of high yield bonds and treasury bills considerably. The UAE launched a T-bonds issuance program in 2022 to develop a local currency bond market and diversify its financial resources.
Similarly, investing in long-term US treasury bonds can also help investors lock in a high yield, earn decent coupons, and achieve stable returns. These instruments are highly liquid and offer attractive capital appreciation potential. Investors can also consider adding a select few high-yield corporate bonds after doing their due diligence.
These bonds carry a higher risk than government bonds. Ideally, investors should opt for bonds with an investment grade rating which are also liquid.
Laddered investment strategy
Building a diversified portfolio of stocks handpicked from the GCC and international markets - and across sectors - can help investors diversify their portfolio effectively. However, retail investors in the UAE should always brace themselves for periodic short-term pullbacks in prices.
That said, they can consider accumulating at lower levels, particularly when the stocks have strong fundamentals and a decent appreciation potential. A laddered investment approach, with different entry levels in the event of pullbacks, can work well in such cases.
The GCC presents a plethora of investment opportunities for retail investors in the UAE. The DFM General Index has been on a tear so far, heading for its best year since 2021. The tremendous growth in the real estate sector, as evidenced by the gain in share prices of Emaar Properties and Emaar Development, has trickled into other sectors like banking and tourism.
Non-cyclical industries like infrastructure, healthcare, and education in the GCC are likely to prove more resilient in the event of a global economic downturn.
An important aspect of any prudent investment strategy is to set aside funds for retirement or unforeseen circumstances and emergencies. The UAE government announced a voluntary end-of-service gratuity scheme for workers in the private sector and free zones in the country.
This initiative will enable employees to invest in a myriad of instruments ranging from risk-free capital-protected investments to risk-based investments carrying different degrees of risks. The scheme is especially useful for employees who intend to live in the UAE in the long run – be it for retirement, purchasing property, or launching their own business.
This scheme creates a sense of financial security and can be particularly attractive for those falling in the high-income bracket. That is because gratuity payment is guaranteed upon quitting their job and is not taxable.
Investors should do understand their risk appetite, and build a diversified portfolio of stocks, bonds and ETFs. Investors should avoid high risk cyclical investments or highly speculative investments to safeguard their capital.