My last article regarding the effect of rising interest rates on the UAE’s equity markets sparked quite a bit of debate on LinkedIn and got me to thinking about how the equity markets have been performing. So I looked at the year to date (YTD) return for Abu Dhabi’s market at found out it is 9.82% as of today (source Bloomberg). For Dubai’s financial market the YTD return is -12.62% (source Bloomberg). This doesn’t tell me much about the overall equity performance on a national level. Continue reading
Waha Capital’s management report for 2017 “[Waha] reported net profit attributable to owners of the Company of AED 425.9 million…” As is my usual approach, I double check the financials. Looking at the bottom of the income statement I see a loss of AED 95m. That’s a difference of over half a billion dirhams. Going up the income statement I find the number that the management uses under “Profit” and the number at the bottom of the income statement is termed “Total comprehensive loss.” The main difference is a loss of AED 543m on some hedges. Now, I confess not to be an expert in accounting but I know quite a bit about investing. Waha’s accountants may be able to persuade their auditors that this classification is correct but Waha’s management should have explained such a large discrepancy to its investors, regardless of what the accounts say. Transparency is the bedrock of good corporate governance and when Waha’s management report does not provide the correct transparency, then there simply cannot be good governance. Waha’s management had a duty to its shareholders to point out the half a billion dirham loss on the hedges and to explain why they where not included in the accounting of the P/L of the company as reported. There might well be a good explanation. But no explanation is not acceptable, especially for an investment company. Continue reading
About a year ago I wrote about the UAE as a financial center and in particular compared it to Singapore. The article states:
Let’s go back to Singapore with a GDP of $293 billion and population of 5.5 million versus our GDP of $371 billion and population of 9 million. So not only is their market cap four times larger than ours as a percentage of GDP, but their GDP per capita is about $53,000 versus our $41,000. [Data source: The World Bank]
In short, the statistics indicated at that time that Singapore was far more efficient as a financial center.
Let’s move to the present day, a year later. A Dubai International Financial Center (DIFC) report, compiled in partnership with Thomson Reuters, was recently released. The DIFC report studied the wealth and asset management opportunities in the Middle East, Africa and South Asia region (Menasa). I got to page six of this 50+ page report and found some statistics that contradicted my view of the world. I summarise them in the table below.
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:
- Assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win.
- 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
In my previous article I suggested, using scenes from the film A Beautiful Mind, that game theory could explain why more than 50 banks exist in an economy too small to commercially need such business. The idea is basically that banks choose to be mediocre because competition would harm them to the benefit of customers.
The feedback was tremendous, and I would like to expand on some of the points made. The first is the concern that I might antagonise people in the banking system. I believe that transparency and open dialogue fosters a healthy commercial environment and that most people will listen if your intent is positive. The few people who have a closed mind might react negatively to new or open ideas. One just needs to accept that this exists and hope that the greater good outweighs any personal backlash.
My co-author today is Karl Happe, chief investment officer of Allianz Global Investors’ Insurance Related Strategies. Although the strategies developed and deployed by Allianz are aimed at the insurance market, there are many important lessons that most investors would benefit from, in particular family offices.
The last few weeks have seen equity markets around the world register significant losses. Sudden downward price movements can be stressful and the conflicting analysis and advice can be confusing. Although I cannot give specific advice on what to do, perhaps I can point out some issues that might have been overlooked and would be useful to consider.
The general consensus is that the current market woes began with a crash of China’s equity markets on Monday, 24 August. The 8.5 per cent drop in the Shanghai Composite Index is what many market commentators agree triggered the global wave of selling. What is not made clear is why the Shanghai tanked and why this would trigger a global crash. The answers proffered are that China’s economy is slowing, and that this in turn will trigger a slowdown in the global economy. This is puzzling because the slowdown has been common knowledge for quite a while now, and anyway Chinese growth is still running at about 7 per cent a year. So what news came out to trigger the price plunge? Nobody seems to have an answer.
Even more perplexing is the effect of China’s economy on the world. The narrative that a brake on China’s economy would slow down global growth has things backwards. China is a supply side economy and depends on robust global demand. It is only if global demand, in particular the United States, were to slow down that we would expect a slowing in the global economy, including China.
My co-author this week is Brooke Coburn, Managing Director and Co-Head of Carlyle Growth Partners and Carlyle Equity Opportunity Fund.
The Carlyle Group is one of the largest and most successful alternative asset managers in the world. With nearly USD 200 billion in assets managed across 130 funds and 156 fund of funds it is daunting just trying to figure out where to start in learning from their best in class experience. I decided to approach the middle market team and highlight their story as, I believe, investors in the Middle East can learn the most from their approach and experience.
Portfolio managers and investment analysts like to say that due diligence, a deep review or audit of a potential investment, is an integral part of their business. They are most probably lying, or if we want to be charitable, they are deluded.
Due diligence is not considered sexy. It involves legal, financial and operational reviews. Where are the six screens with hundreds of flashing numbers? Where are the bank of telephones with people shouting orders into them? Where are the oak-panelled boardrooms? The late nights at Cipriani’s and Harry’s? Where, when all is said and done, are the … well, let us not get too carried away.
Portfolio managers and investment analysts rarely perform due diligence personally. They rarely even lead the process. Just look at all the professionals taken in by the Madoff scandal. This is a shame, as due diligence is the only way to consistently make money.
The debate of whether discounted cash flows or peer group comparisons are the better business model has raged ever since M&A became vogue. Let me put an end to the suspense right now: both are useless as effective valuation tools. Let’s find out why and what might work.
Discounted Cash Flow
The problem with discounted cash flows (DCF) is the sensitivity to a large number of parameters especially since DCF is usually used to predict high-growth. It is hard enough to predict the future performance of stable businesses. Trying to predict the performance of companies in a growth phase is indistinguishable from guessing.
So how should you go about valuing the company that is about to go into a high-growth phase? The short answer is you use a value based on the scenario that the company continues as is. In other words the high-growth is as much a result of your cash as it is of the company’s business. Therefore the growth phase piece should be treated as if it is a complete start-up where everything is valued at book value and therefore there is no premium on the current business.