Category Archives: Analysis

Your health depends on a balanced healthcare playing field

September 4, 2017 By in Analysis, Economy, Government Tags: , , 1 Comment

It is my opinion that one of the greatest moves to support free market capitalism in the UAE is the cancellation for Abu Dhabi Thiqa insurance beneficiaries of the 20% co-pay for treatment at private healthcare facilities.  The 20% co-pay was introduced in June 2016 and at that time there was discussion on the effect on patients.  There was also, however, a massive impact to the economy, but I felt that at that time the personal and social issues should take precedence over the economy. I think that now might be a good time to review that impact of that decision with respect to the economy and the positive effects of the cancellation of the decision.

Why is the co-pay issue important? As a first pass, clearly applying a 20% co-pay to private hospitals would incentivise beneficiaries to choose public hospitals. Money isn’t the only issue for a patient in determining which healthcare facility to visit but in the absence of specialisation issues it is clear that money becomes one of the predominant deciding factors.

The consequence, of course, is material negative impact on the finances of these private hospitals. The effect was quickly felt at three long-term healthcare centres in the Emirate of Abu Dhabi who quickly had their co-pay requirements waived in January 2017,  and the quick government response allowed these institutions to continue providing important healthcare services.

The positive social impact is clear. But what is the positive economic impact? It is the strengthening of the healthcare sector, not because Thiqa is willing to pay for the full cost but because giving private institutions the same economic opportunities as public institutions allows them to not only thrive but to also take risks that only private companies take. Risks such as acquisitions that lead to consolidation in the health care sector and thereby a strengthening of the sector. Continue reading →

A case study on reporting and transparency of company results

September 1, 2017 By in Corporate Governance, Analysis Tags: ,

In April of this year I talked about  some of the puzzling moves at Shuaa Capital, one of the better known investment banks in the region which is headquartered and listed in Dubai. Last month Shuaa released their H1 2017 financial results and there was quite a bit of commentary around these results. This commentary seemed to contradict the behaviour that I outlined in April. So I waited and read through the results, the press releases, the news articles and TV interviews. Now I’m ready to give a more realistic analysis of the results. My analysis will be dual, of the actual performance and of how the performance is reported. The latter is critical, as I have pointed out earlier this year on less than optimal reporting or commentary by First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Emirates NBD, Mashreq Bank, Arabtec and Etisalat but stellar reporting by Dubai’s SWF ICD (all links are to my articles on reporting and transparency by these companies which were published in The National). Continue reading →

Your idea of success is completely wrong

August 22, 2017 By in Analysis, Management Tags: , ,

There is this idea that success is 100% correct decision making. For some people, they understand this to be 90% or even 80% correct decision making. This idea is completely wrong. A success rate of 56%, implying 44% incorrect decisions, is a great result. Here’s why.

Let’s simplify things. Assume that you are the chief executive of a company and that each decision you make has, on average, an equal impact on the company performance. Let’s say that if you make a good decision you increase profit by USD 1 million and if you make a bad decision you decrease profit by USD 1 million.

What does this mean in terms of the company performance? Continue reading →

Chelsea Football Club Innovates Financially

August 4, 2017 By in Credit, Analysis

I just found out that Chelsea Football Club is applying ideas from financial leasing to their football player lending programme.

I was shocked. The analysis is quite interesting. To me at least.

The movie Moneyball, based on the book by the same name, showcased the use of financial ideas in sports, in this particular case baseball. There are two parts to it. The first was picking the right performance indicators and, just as importantly, ignoring well established but ultimately useless indicators. A similar challenge happened with the infamous Black-Scholes equation, which ignored the probability of the price of a financial security rising or falling when computing the price of a derivative on that security.

The second part of Moneyball is to look at the price per unit for the new performance indicators when looking at buying or selling a player. This showed that the market in baseball was inefficient and the first teams to adopt this new pricing mechanism reaped great rewards. In effect what was happening was a weak form of arbitrage. Again, this is similar to traders in the nascent derivatives markets who adopted the Black-Scholes pricing model. Continue reading →

Your stop loss orders aren't guaranteed to protect you

August 4, 2017 By in Trading, Analysis Tags: ,

Speaking of trading, I want to talk about certain trading misconceptions. I recently talked about the liquidity trap that some investors were getting themselves into when investing in illiquid stocks. The issue is not an investment issue but a trading issue that can greatly affect the overall IRR. In discussions about this trading trap some other misconceptions came up and I’d like to address one of them: the stop loss order (SLO). In their most basic form these are orders that you give to your broker to sell a security if it drops below a certain price.

The main misconception with SLOs is that when the price of a security drops it will touch every price on the way down. For example, if you bought shares which are now at Dh20 and you put in a stop loss at 19.8 this will not necessarily trigger a sale at 19.8. One reason is that if the last trade is 20 and the next trade is 19.6 then you’ve passed by 19.8. If your broker actually manages to sell at 19.6 you’ve still lost an extra 1 per cent of your position. But there is no guarantee that your broker can sell at the lower price. I recall in mid-1998 that the UAE markets, then trading over the counter (OTC), had been enjoying a great rally when they suddenly collapsed. I saw an order for the most liquid shares at the time, Emaar Properties, executed at Dh160 a share. The crash started the next day and the buyer immediately tried to sell the position. It took several days before a new buyer was found, at a price of Dh40 a share. That is a 75 per cent loss. Remember, this was not about Emaar, the whole market had crashed. Continue reading →

The UAE's banking paradox

August 1, 2017 By in Analysis Tags:

In this section I look at the UAE banking system and come to some startling conclusions. It seems that banks are grabbing market share in a market with deteriorating margins and increased risks.

Last week I took a look at Union National Bank’s Q2 financial results. The focus was to look beyond the headline numbers and try to understand the underlying fundamentals and what the core trend might be. This led to the idea of core revenue and expenses, ie interest income from direct lending and debt securities and interest expense of deposits and debt securities. UNB also provides Islamic financing so I added those in as well. This tells us what is happening at the basic banking level and then I look at any out-of-the-ordinary movements in other parts of the business.

Mashreq recently reported Q2 results and announced an increase in profit of 3.4 per cent over Q2 2016. But looking at basic banking, core revenue rose 9.97 per cent whilst core expenses rose 19 per cent. This is not a good sign since if it continues, sooner or later, net core income will become negative. Operating expenses are flat at about 1 per cent so had little impact on changes to net profit. Continue reading →

Dubai Financial Markets Investor Structure Improving

July 11, 2017 By in Trading, Investments, Analysis Tags: ,

My foray into DFM’s historical data unearthed some interesting nuggets, both of which I consider positive.

For the first half of this year, Arab investors, including from the GCC, withdrew a total of AED 1.6 billion from the market while UAE citizens invested a total of AED 421 million. Here is the first interesting bit, the total investments by non-Arab investors was AED 1.2 billion. That is remarkable and exactly the kind of statistic we want to see, a more balanced and broader foreign investment profile.

In essence what the above indicates is that the UAE has managed to increase foreign non-Arab investment at a time when oil prices have dropped from historical levels. This is not only a vote of confidence, it is a positive trend.

The second statistic is type of investor, with individuals selling AED 628 million to institutions. This, too, is positive as increased institutional investing is key to developing a market, not least because they have a higher tendency to impose corporate governance.

This article was originally published in The National.

Analysing Abu Dhabi Investment Authority's Performance

July 9, 2017 By in Analysis Tags: ,

Last year I did a bit of complex analysis, mostly trying to estimate returns, to understand Adia’s 7.5% 30 year internal rate of return (IRR) ending in 2015. This year I will make it easier. Adia’s 2016 30-year IRR was reported as 6.9%. Did Adia perform poorly in 2016?

It is difficult to tell as there are two bits of information that we need. First, recall that investment performance is usually against benchmarks. We do not know what Adia’s is, but I have used the MSCI World Index. It isn’t necessarily appropriate but given Adia’s size, which means it is a major global investor, it can be insightful. The other thing we need to remember is that the 30 years ending in 2016 starts in 1986 whilst for 2015 it started in 1985. Therefore the only difference between the two are the years 2016 and 1985.

So we can look at the difference in 2016 return relative to the 1985, i.e. if Adia had a return of +20% in 2016 but +30% in 1985 then the 30-year IRR drops even though Adia did well in 2016. This is because the IRR gains the +20% of 2016 but loses the historical +30% of 1985. In this case Adia would be penalised on their good 2016 return because they had made a much better one in 1985.

From a mathematical point of view we can’t get the actual difference between Adia’s 2016 and 1985 returns, but we can get the ratio. For Adia its 2016 return is 15% lower than its 2015 return. The MSCI WI as per MSCI’s website is 5.32% for 2016 and 36.62% for 1986 which is a decline of 23%. Adia clearly outperformed the MSCI WI in 2016 relative to 1985 by a large margin. Since we don’t have actual numbers we can’t tell if Adia underperformed the MSCI in 1986, outperformed it in 2016 or a combination of both.

What we can say is that Adia has, directionally, improved dramatically in its ability to manage its investments. A sign of the growth of our country not only in terms of population, real estate and economy but also in terms of effectiveness and efficiency.

This article was originally published in The National.

Financial Model Pitfalls

March 15, 2016 By in Analysis Tags: 1 Comment

One of my previous jobs was to be a rocket scientist – financial jargon for somebody who is good at mathematics.

Naturally, this makes you the guy who works the most on the financial models that drive strategy.

A financial model simulates the future, and by manipulating the various inputs to the model you are supposed to get an idea of how the company will perform. From these scenarios you learn which strategy to pick.
What could go wrong? Every­thing.

Continue reading →