QUESTION – I have just landed a job in the UAE and I find stock prices quite cheap here. Since all my investments are in international currency investments in mutual funds and real estate, do you think an exposure to regional securities is a good idea?
ANSWER – A Firstly congratulations on your new job! While I am not a stock broker, and so not able to comment on individual companies that are quoted on the regional markets, I am happy to give my views as to whether it is a good idea to consider investing in them or not. Based on a number of factors that I will discuss, I would say that an exposure to regional securities could be a good idea, and I am sure that there are some great opportunities to benefit from.
There are a number of markets in the region, with all of the GCC countries having their own stock markets, and the UAE actually having three markets within 150km of each other. They are all governed by different rules, and obviously are denominated in different currencies. Certain companies also have rules regarding the amount of stock non-nationals are able to own.
The regional markets have experienced a roller coaster ride over the past few years. Most of the bourses are quite new, and have relatively low level of trades on the markets. For example the Dubai Financial Market (DFM) opened to trading in March 2000, and it now has over 65 companies listed on the market. But when compared to some international markets the total amount of trades that occur in a day here, would only take a few minutes elsewhere.
This small level of trading on certain markets can lead to a high amount of volatility as it can prove difficult to sell particular shares as and when you would like to, and to actually sell the holding, the price may have to be reduced significantly. Indeed some shares on certain markets can experience little or no trades for days or even weeks. This obviously needs to be considered before buying any holding to make sure you can actually secure one and then be able to sell it again.
Regional markets in the upturn
The regional markets have experienced volatility lately, even more so than other more established markets around the world. As with the upturn the world’s markets have experienced over the past couple of months, the regional markets have also picked up, but it is a brave call to say where markets are going next.
It is worth discussing the area of risk. The last year or so has brought risk sharply back into focus, as most assets have retreated from record highs. From my perspective as a financial consultant, direct shares would be at the very top of the risk spectrum, which means that although they can produce high returns, the potential for loss is also greater. However, if you were to talk to a stockbroker, I am sure they would use a different risk scale, and blue chip companies that are quoted on the FTSE100 or Dow Jones 30 would be classed as lower risk than a company quoted on a regional market here.
Investing into direct securities
Another factor to consider is how you are planning to buy your shares. Are you looking to invest a lump sum or do you wish to invest regularly? Are you looking to day-trade or to hold the stocks for a length of time? This may well have a bearing on the stocks that you wish to hold, and how you wish to invest into them.
How much of your total portfolio are you considering investing into these equities? I would normally recommend to clients that if they wish to invest into direct securities, that it should be around 10% of their total portfolio, unless they are completely comfortable with the risks involved.
The amount that you are looking to invest, and how many different shares you wish to purchase may have a bearing on the best way to invest, as there are mutual funds available that invest into all of the regional markets, and can offer a level of diversification that would be virtually impossible as an individual investor.
In summary, if you do your research, are fully aware of what you are investing into, can spend the time following the markets, and are happy to ride the peaks and troughs, then the regional markets can offer some great opportunities.
As with all aspects of your financial affairs, you should regularly review your financial situation to make sure it continues to reflect your wishes and requirements.