It is largely understood that asset prices are likely to be the most vulnerable to purely social movements because there is no accepted theory by which to understand the worth of these assets. Investors have no model, or at best a very incomplete model of the behavior of prices, dividends, rental yields, or earnings of such assets.
Hence, they are broadly lumped into the category of speculative assets. With gambling instincts that run amok periodically, we see assets that have no intrinsic value (such as crypto, or even art) that trade at absurd levels. We have seen such manias on a macro level too; the overall 12-month trailing price earnings ratio of stock prices in Japan rose to over 60x in 1989.
The subsequent 3 decade period have seen investors make a total return (including dividends of less than 5 per cent). The issue with viewing assets as ‘lottery tickets’ is to forget the maxim of investing, which is to buy businesses. Through this lens, it is about the return businesses are generating, which then gains weight through the miracle of compounding returns.
Valuation then becomes the key metric; in point of fact, the investor actually wants the price of the asset to go down even after the purchasing has begun, such that more can be accumulated. Day-to-day price movements become irrelevant, and only extremes are focused on (either absurdly low, or markedly high).
Viewed this way, investing becomes more about controlling temperament rather than a function of intelligence, especially in the over-stimulated environment of social media and constant news.
Spreading across asset categories
In the local populace, there remains a clear bias for investing in all things American, especially when it comes to financial assets (stocks, crypto, etc.). Curiously, it was not long ago when the same bias was evident with regards to real estate. London was the most preferred hunting ground for most of the expatriate community.
That zeitgeist has shifted definitively, yet nowhere in the history of financial and urban development has there been a sustained ‘runaway effect’ in the price of one asset class without an impact on others. In other words, the entire floor rises with economic development and a more flexible economic system.
Undoubtedly, even within the realm of financial assets, IPOs are a world within a world, a corner of the marketplace made up of its own characters, customs and regulations that are nearly as hard to pull apart and create an ecosystem of excessive leverage and speculation. Market participants act and react to events taking place in real time, and yet this swirl of decision making is somehow seemed as efficient - when we know that frothiness as well as negative bubbles periodically occur.
In Japan, the stage is set for a period of above market returns, given the prevailing valuations, whereas in America, broadly speaking, the reverse is true, regardless of sentiments. Where does that leave markets like the UAE?
Buying in at fair value
The recent spate of IPO activity has coincided with other corporate behavior as well - the proposed turnaround of Union Properties, Sukoon’s takeover of Ascana, and the takeover of Network International by CVC, amidst other merger activity. It suggests that as market breadth increases, there is a growing realization that valuations in the marketplace remain skewed towards inexpensive.
The greater number of participants is increasing activity in the secondary stock markets, with the listing of the payments provider - and first fintech player - MBME group, with Ethmaar expected to list in the first week of May. These private sector offerings will be offered at varying valuations, and in the process allow investors greater choice to allocate their capital, thereby normalizing capital market activity as well as encouraging capital formation and risk-on behavior.
Whilst the US has led the way with innovation, an increase in technology offerings in the UAE will similarly encourage and allow for greater emphasis on capital raising for domestic businesses, for those that understand it.
Buying into valuations minus the froth
For the rest of us, the emphasis on dividends a way of making returns from stable businesses together with the compounding effect allows for wealth creation, hitherto not accessible for the expat community. In either case, it is about buying businesses, rather than focusing on price movements (other than looking at valuations).
Courses that look to arcane price trends, increase price efficiency, often leading to nonsensical prices (Doordash anyone?), as herd mentality implies that prices are set at the margin by the most emotional person. It is these skewed emotions that skew valuations (as they did in Japan in the late 1980s, and arguably have in the US more recently.
In the UAE, the aggregate prices imply that price and risk are positively correlated (buying Network international is less risky after its stock price drop). The same pattern played out in Dubai’s real estate market, despite the naysayers.
As long as investors get this fundamental approach, the growth in capital markets to come (primary and secondary) is a gift waiting to be unwrapped.
