Risk adverse Gulf investors getting their asset allocation wrong

Investors generally adopt a herd mentality and buy high and sell low. In the process millions are lost and millions are paid in fees to advisers who tell them what they want to hear to flog their funds. It is sad to see that Gulf investors are still falling into this trap.

According to a survey of professional asset managers and independent financial advisers by Invesco Asset Management, 82 per cent of Gulf investors favor exposure to emerging markets over the next three to five years compared with 30 per cent for North America, 14 per cent for Europe and eight per cent for Japan.

China and India

China and India are ranked top as investment destinations. GCC asset classes were favored by 25 per cent of respondents, not a very high score for locally held assets.

The Invesco survey also showed the well known short time horizons of investors in the Gulf. Only 12 per cent of institutional investors think beyond five years, and 38 per cent of small investors have a time horizon of under a year.

Has the crowd got it right this time? ArabianMoney thinks not. Follow the investment herd and you are not seeking safety but disaster. Let us explain briefly why, although if you want a more detailed view then you ought to subscribe to our monthly newsletter.

China and India are emerging markets. Correct. Do such markets have the most volatile asset price swings? Yes. Do those markets look overbought at the moment? Well that is debatable but certainly their economic growth cycles appear to be close to a top. Is that a time to buy stocks?

Never, ever does this work. Please write if you can think of an example of when buying stocks at the top of an economic cycle has proven a good investment. We would like to hear from you.

Now what about North America as an alternative? Where have you been living for the past two years? The US economy has a serious structural deficit and massive debts. Its currency is becoming overvalued, unemployment levels are rising and housing foreclosures about to surge. And at the same time its stock market has been driven to absurd valuation levels for the profit outlook in this depressed economy.

Japan best buy?

Actually Japan looks the best bet of the major economies, if only because the value of its stock market quoted companies is well below book value and absurdly low. Our friends at The Day of Reckoning have Japanese stocks as their ‘Trade of the Decade’ for this reason.

Gulf investors would rather pay high prices at the top of the economic boom in China and India than pick up a bargain in Japan. It is even arguable that Europe ought to be considered for its recovery prospects.

The Organisation of Economic Cooperation and Development argues that the devaluation of the euro is actually going to boost economic growth in Europe, and is not an indication that huge sovereign debt levels are going to force a new age of austerity and recession. That looks obvious bunk but they are saying it.

However, local investors are probably on more solid ground in buying GCC stocks at present valuations, particularly the UAE which the last issue of the ArabianMoney newsletter made its ‘Trade of the Decade’, so at least they are getting that much right.