Tag Archives: Analysis

The Investing Edge: The Win / Pay Odds Gap

September 11, 2017 By in Investments Tags: , , ,

Investing is too often looked at using a handful of academic models. Successful investing involves thinking about the investment process in as many different ways as possible. This article takes a look at investing using alternative views.

From Betting to Investing

Many of the ideas used by the investment community are adopted from the horse track and casino betting communities. Much of the failure that has dogged the investment community is due to rocket scientist PhDs misunderstanding the successful models of plebeian punters. The use of betting as an example is not an endorsement, just history.

To understand how the securities markets work you have to look no further than the horse bookies. Bookies take bets from the bettors. This is the first point that the public begins to misunderstand how betting, and therefore investing, works.

There are two potential misunderstandings:

  1. Assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win.
  2. Assuming that the bookie offers one to one payout odds, i.e. pays $1 for each $1 that is bet.

Grasping the significance of these statements is the key to successful investing. The bookie, equivalent to the investment bank or broker, will always make money. Always. They do this because they do not set payout odds depending on which horse they think will win, they set payout odds based on how people bet. Continue reading →

Your health depends on a balanced healthcare playing field

September 4, 2017 By in Economy, Government, Analysis 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 Management, Analysis 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 →

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 →

UNB kicks off earnings season

July 18, 2017 By in Finance Tags: ,

Abu Dhabi lender Union National Bank announced its second-quarter financials. On the face of it things look positive with an increase in net profit of 7.2 per cent relative to the same period last year and that net income from interest and Islamic financing, the core business of a bank, rose 2.6 per cent. However, a quick peek at the underlying fundamentals shows that core revenue from interest and Islamic financing grew 6.4 per cent whilst expenses for interest and Islamic financing grew 13.4 per cent.  Core expenses growing faster than core revenue is unsustainable. When you factor in that operating expenses grew by a whopping 21.1 per cent the picture looks less than sterling. The main driver for the increase in net profit is retail fees and recoveries which grew 43.7 per cent, an unsustainable growth rate for this profit line item.

Stay tuned as I take a deep dive into reported second-quarter earnings next week and uncover whether the net profit reported is quality or whether the underlying fundamentals are deteriorating.

Sabah al-Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more on his Twitter feed or for deeper analysis on LinkedIn and al-binali.com.

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.

Dana Gas seems confused about sukuk pricing

July 7, 2017 By in Trading, Analysis Tags: ,

Dana Gas’s CEO thinks his sukuk coupons are above market even though the sukuk price is below market. This is inconsistent.

I am not discussing any Sharia law issues here, just the simple dynamics of the bond (including sukuk) market. This opinion is based on an article in The National.

According to Dana Gas’s CEO the sukuk are paying an interest rate (as I call it) of 7% and 9% depending on the tranche. He says that the market yield indicates a yield below 4%. This indicates that the coupon is fixed not floating. The fact that the yield on the sukuk has not moved indicates a fixed interest rate rather than a floating interest rate. From now on when I say interest rate, I mean fixed interest.

In general if a simple bond is paying a coupon of 10% then there are three scenarious on where the price is. If market yield is 10% then the price will be 100 (as a percent of face value). If market yields are lower < 10% then price should be > 100, and vice versa.

A couple of weeks ago DG sukuk where trading at around 40, a huge discount, which meant that the market expected a yield well above the 7% and 9% coupons (before that, the price was even lower than 40). This means that the statement by DG’s CEO that market indications are that the sukuk yield for DG should be below 4% are completely contradictory to the actual market price from a couple of weeks ago.

However, in the last two weeks the sukuk price rallied miraculously to around 100. I could not find any announcements to support such a 150% price move in three weeks which would indicate the possibility of market manipulation. But if it is a real move this still contradicts Dana Gas’s CEO as a price of 100 means that the 7% and 9% coupons are the actual market yield.

From the article it seems that the original sukuk had a convertible element which would make it a valuable option for sukuk holders. This would mean that if this element is removed, as the CEO indicates, then the actual yield in market would have to increase from 7% and 9% to compensate sukuk holders.

Dana Gas’s CEO seems to be confused about two things. The first is if a company issues a bond at a fixed coupon and later market yields drop, this does not give the company the right to destroy the bonds and replace them with something cheaper. They are a commitment, one which needs to be honoured.

The second confusion stems from  the following in the article “[The CEO of Dana Gas said] traders in the previous structure [the sukuk with the convertible element] had arbitraged and dumped the shares, depressing the shares in a manner that is unfair to existing shareholders.” This statement indicates a misunderstanding of a basic point of finance – arbitrage is good as it keeps markets efficient and in sync. The idea that market movements are unfair to shareholders because convertible sukuk holders acted legally in the market holds no water. If anything happens untoward in the market then shareholders should seek justice from the regulator, the Securities and Commodities Authority. To have the company punish sukuk holders in favour of shareholders is wrong.