END of 2007, the world woke up to a new concept in finance - sub prime. But that was in the US, we all thought. September 15, 2008 saw Wall Street giant Lehman Brothers filing the largest bankruptcy petition in US history. And the stock indices - from Nikkei to Hang Seng to Kospi to BSE Sensex to FTSE to Dow Jones Composite Average and the NASDAQ went on a tizzy, sometimes plunging to historic lows, leaving stock trends analysis experts at a loss. Did any of us think that these were inter-linked symptoms of a much wider and deeper investment problem the world over? Did any of us think that the faster we questioned the wisdom of the investment and banking pundits, the better protection we could have ensured for ourselves?
No, most of us were just hoping that what happened on Wall Street ended there, with no repercussions for small investors, investors who pump in their hard-earned buck in the hope of a brighter future.
We neatly enveloped one single economic reality that in a globalised world there is no cushion which will absorb the shock of Wall Street and stay unaffected. Globalisation has ensured that recession hit our very own peaceful backyards - we have seen our net worth erode, in varying degrees. Some of us who dreamed of faster upward mobility fuelled by a risk appetite, which can now be called 'adventurous' and have invested only in equity, have felt a larger impact. Others who lacked the courage, but have been more prudent and have had a mixed basket, with a larger component of debt, are in a relatively better position.
The former group forgot the basics of the economic cycle that has some periodic phases: Peak (when the economy is running at full steam; employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit and income levels are increasing.); Recession (when after experiencing a great deal of growth and success, income and employment begin to decline. As wages and prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period.); Trough (also sometimes referred to as a depression, when depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.); and Expansion/Recovery (when the economy is growing once again and moving away from the bottoms experienced at the trough).
This cyclic pattern of the economy has been harped on by economists for a long time. Problem is that, this economic wisdom has not percolated to the investment gurus who assumed that the rollicking times on the global stock markets would just carry on.Qatar Today has spoken to a panel of experts who give their take on investment prudence and a cross section of people who invest regularly and the lesson they have drawn from this ongoing recession.
How well Have you invested?
This question has no one standard answer. Many regular investors who have been investing on the stock market for a long time feel that the recession was not foreseen. "I have made some investments; however, this world economic crisis was not foreseen. Come to think of it, I don't think my investments were very prudently done," says Nabil Rizk, Public Relations Advisor, Kahramaa.
Others have spread risks as a strategy. Such investors appear to be relatively more comfortable in the climate of recessionary uncertainty. "The old adage, put your eggs in different baskets still applies during bull and bear markets. I try to stick to this principle regardless of the ups and downs of economic cycles. I spread risk to achieve balance. What goes down can go back up and vice versa to borrow an old stock market view," says Michael Vertigans, Director of Public Affairs, Weill Cornell Medical College in Qatar.
"I think 'mixed' would be a fair answer to this question. On the plus side, I invested early in property in Qatar, which has done well, and my wider investment portfolio was well-balanced with a medium- to long-term view. On the negative side, I bought large cap equities early in 2008 which have not done so well but hopefully over a 10-year cycle, will come back," says Simon P Casson, General Manager, Four Seasons Hotel Doha."I think I have done a pretty good job when it comes to investment. I have investments in real estate in Europe and the value of my real estate hasn't fallen," says Viviane Sarkis, Associate Vice President, BPG Public Relations.
Erosion in value
Regardless of the way one has invested, it is most likely that there has been some erosion in the value of the investments, except if investments have been made in the form of bank FDs or plain vanilla debt instruments like guaranteed bonds. What comes across from the investors is that they are more prepared now. What was a shock in 2008, has settled and has made them more seasoned. "It was bad, I lost a lot and I am predicting more loss till the end of the current year," says Rizk, in a matter-of-fact way. But with an added dose of investor patience, it is likely that the value will recover. Clearly, the idea is to invest with a long-term perspective.
"Right now most of my investments are long-term and so I am not looking at their value today but more at what they are likely to be valued at when I need the money in 10 years or so. I, therefore, see the erosion in much the same way as I see the massive value increase - irrelevant right now as I am not looking to cash in the investments today," says Mike Hynes, Managing Partner, Kershaw Leonard.
"Philosophically and with a long-term view. My investments were never intended to fund short-term goals or objectives," comments Casson.
siPs: wHat to do?
The unique gift in financial history is that of mutual funds. The route of investment is through Systematic Investment Plans (SIPs). With the global stock market tizzy that we have been seeing since the third quarter of 2008, one question that has crossed all our minds is: what to do with the SIPs? As anything, investment is also a matter of attitude. Thus, when Rizk says, "Luckily, I had some SIPs that was due exit, so I exited these without paying any exit load. However, I still have some SIP's invested and I am hoping for the best," his tempered optimism comes across.
Contrast this with a more seasoned approach that Vertigans advocates when he says, "Review and take a mid- to long- term view. Patience usually helps." Describing himself as a mixture of cautious, adventurous or wise, Hynes says, "I think I am all three as I look at my portfolio as an overall investment that needs a mixture to be successful." Both Vertigans and Rizk prefer to be cautious. "I don't need to crystallise any investments to meet current needs and that would be the only real reason that you would take a loss and cash in. I have moved within pension funds out of property-related investments and geared more to emerging markets and larger cap stocks which I think will have some good upside in the coming five years. I also invested in March in the DSM which, with hindsight, represented a good low point to get in at," Casson adds.
Recession and future savings habits: Lessons learnt
What we derive from the recession is a factor of how we react to risk and how much is our risk appetite. But one thing is obvious: we have learnt to take things in stride and move with caution.
"I would stay away from the stock market. I would stay away from commodities. I would stay away from credit, both high-yield and high-grade. I would stay in cash or cash-like instruments such as short-term or longer-term government bonds. It's better to stay in things with low returns rather than to lose 50 percent of your wealth. You should preserve capital. It'll be hard and challenging enough I guess," says Rizk. For Vertigans, it is simple when he says, "Stick to what you know and how you feel. If you are a creature of habit don't get adventurous." Hynes is clearly in favour of balance. He says, "I think there is always room for balanced instruments of investment. I personally look at making sure if I am taking a high risk with one investment; I have plenty of other solid or lower risk investments to even things out." "Certainly this current crisis has caused me to think carefully and the three main lessons I take from it are: First, focus on timing (diversify away from equities and into very safe investment vehicles at least five years before I plan to retire. The risk of being caught out by a similar situation a year or two before retirement is too high); Second, cash is king (while returns are low compared to equities the potential of losses is not there. Having a percentage of your portfolio in cash also allows you to take advantage of a crash like this); and Third, that the market has always been cyclical and always will be," adds Casson in the vein of a seasoned investor.
"I would stay away from the Stock markets for sure. I am into real estate outside Qatar, as the real estate sector was badly hit in this region, so I consider myself lucky that I have not invested here. For the time being, I am not planning to do further investments, I will keep the cash," says Sarkis.
The way ahead: invest with a little understanding
While it would be utopian to have the economy grow at a stable rate, economic recessions are a fact of life and are as unavoidable as the setting of the sun. Like the sun, the economy goes through periods of rising (growth and expansion) and periods of setting (decline and recession). The real key to investing before, during and after a recession is to keep an eye on the big picture, as opposed to trying to time your way in and out of various market sectors, niches and individual stocks. Thus we have professional investment advisers. But the selection of one depends on what you want. Ideally he should understand your attitude to investment risk, your savings propensities and goals you have set for yourself.
"I carefully selected a financial advisor around eight years ago. He fully understands my attitudes to risk etc, and has consistently recommended excellent investment opportunities for me. He has also acted swiftly when needed to protect the gains that we have made and so I am happy that my investments are doing well despite the recession," says Hynes. There's, however, no need to be discouraged because there are many ways an ordinary person can invest to protect and profit during these economic cycles.
Stocks
When investing in stocks during recessionary periods, the relatively safest places to invest are in high-quality companies with long business histories, as these should be companies that can handle prolonged periods of weakness in the market.
For example, companies with strong balance sheets, including those with little debt and strong cash flows, tend to do much better than companies with significant operating leverage (or debt) and poor cash flows. A company with a strong balance sheet/cash flow is better able to handle an economic downturn and should still be able to fund its operations as it moves through the weak economic times. In contrast, a company with a lot of debt may be damaged if it can't handle its debt payments and the costs associated with its continuing operations.
Fixed Income
Fixed-income markets are no exception to this line of reasoning. Again, as investors become more concerned about risk, they tend to shy away from it. Practically speaking, this means investors steer clear of credit risk, meaning all corporate bonds (especially high-yield bond) and mortgage-backed securities because these investments have higher default rates than government securities. Again, as the economy weakens, businesses have a more difficult time generating revenues and earnings, which can make debt repayment more difficult and could lead to bankruptcy as a worst case scenario.
Moreover, as investors sell these assets, they seek safety and move into treasury bonds. In other words, the prices of risky bonds go down as people sell (or the yields increase) and the prices on treasury bonds go up (or the yields decrease).
Commodities
Another area of investing you want to consider in the context of a recession is commodity markets. The general rule to understand about these investments is to keep in mind that growing economies need inputs, or natural resources. As economies grow, the need for natural resources grows, and the prices for those resources rise.
Conversely, as economies slow, the demand slows and prices go down. So, if investors believe a recession is forthcoming, they will sell commodities, driving prices lower. However, commodities are traded on a global basis, and economic activity is not the sole driver of demand for resources such as oil, gas, steel, etc.
If you expect a recession, positioning your portfolio is quite simple. Shift assets away from equities, especially the riskiest equities like small stocks. You should also move away from credit risk in fixed-income markets and into Treasuries.
One way is to engage in Dollar-Cost Averaging (DCA, also referred to as a 'constant dollar plan'), is a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. For example, you decide to purchase $100 worth of XYZ each month for three months. In June, XYZ is worth $33, so you buy three shares. In July, XYZ is worth $25, so you buy four additional shares this time.
Finally, in August, XYZ is worth $20, so you buy five shares. In total, you purchased 12 shares for an average price of approximately $25 each.
Recession: Lessons learnt
The deep recession sparked by a financial crisis had its origins in reckless lending practices involving the origination and distribution of mortgage debt in the United States. Sub-prime loans losses in 2007 exposed other risky loans and over-inflated asset prices. With the losses mounting, a panic developed in inter-bank lending. The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The exorbitant rise in asset prices and associated boom in economic demand is considered a result of the extended period of easily available credit and inadequate regulation and oversight. The point of origin of the great financial crisis of 2007-2009 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of sub prime mortgages were the first symptom of a credit boom tuned to bust and of a real estate shock .The low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. In addition, the failure of regulators and supervisors in spotting and correcting the emerging weaknesses resulted in this financial crisis and thereby to a recession of such massive proportion.
Sovereign wealth: Funds and recession
The SWF play several favourable roles in the region including creating economic stabilisation, investing for the long term, and seeking high financial returns.
They may consider enhancing their roles through boosting economic activities by managing government enterprise and supporting strategic projects, fostering regional and international cooperation, and instituting best-practices reforms. They can support local growth through international investments. International investments provide a means of collaboration with management and an understanding of business models, operations, and strategies. Investments in multinational corporations help bring in sought-after technologies and knowledge to add value locally and transfer intangible technology capital. In the wake of the financial meltdown, most of the SWFs in the Middle East have become risk-averse.
Instead, they are now turning inward to stimulate their own slumping economies and thus reducing purchases of foreign assets. The need to expand government spending to moderate the hit on local economies, along with lower oil revenues, is absorbing most, if not all, of any surpluses at home.
Recession and Insurance
There is no doubt in anyone's mind that we are living in very challenging times in the financial markets in which many of us are working. We are now about to complete a year into the turmoil. It is obvious that everyone should be cautious and we are hearing a lot about controlling expense, and it is every businessman's objective to make sure that he is able to continue to run his business in such challenging times. The question I will focus on is whether insurance can help in getting through these challenging times. The answer to this is Yes, insurance can do that, as the old saying goes, 'Insurance coverage is like vaccination against disease'.
It has always been the case that insurance affects everything and everything affects insurance. It is generally
understood that insurance is one of the pillars of the economy as it allows those who participate in the economy to produce goods and services without the paralysing fear that some adverse incident could leave them destitute or unable to function. Having said that, few people are aware of the insurance impact on state, local and national economies.
Financial intermediaries
Insurance companies also help support the economy through their investments. As part of the financial services industry, insurers act as financial intermediaries, investing the funds they collect for providing insurance protection. The industry's financial assets in the US were over $6 trillion in 2007, including $1.4 trillion for the general insurance sector and $5 trillion for the life sector. Taking the US as an example once more, insurers contribute more than $280 billion to the nation's Gross Domestic Product (GDP). Obviously insurance companies are paying the taxes, which again, will contribute in the governmental income, and which reaches about 2 percent of all taxes collected by the government in the western countries and reached $15 billion in the US.
The insurance industry is a key player in the capital markets in any country. In the US, it reached nearly $5 trillion in government and corporate securities in 2007. Insurance companies invest the premiums they collect in the country and government securities, helping to fund the building of roads, schools and other public projects. They provide businesses with capital for research, expansions and other ventures through their investments in corporate equities and bonds.
Insurance plays a vital role in helping the business - recovering from a potential risk or crisis such as fire, earthquake, etc. This is considered to be classic insurance, in today's environment, with business facing a real challenge in the 'decision making'.
The company executives are required to take decisions which may turn to have them responsible in front of their shareholders, their employees or even the public. Going into one particular market or shutting down a profitable business is an example of these decisions. Insurance does provide support in this regard so that decision-makers can act with full confidence that they will not face financial difficulties.
Small and Medium Enterprises
Major companies and investors will look at insurance as a way of protecting their assets, but it is the SMEs that need a little education in this aspect. Interestingly enough a recent survey by a small business insurance specialist revealed that people who are running small firms are increasingly worried about business and its success. Roughly 65 percent of small decision makers are considering potential problems or issues facing their operations, revealed the opinion poll. Layoffs, cutting costs and eliminating unnecessary expenses are among their concerns. However, one way to prevent some of the added stress is to ensure small business insurance cover
age is meeting all the company's needs. Looking at the Middle East and GCC, the economy has its own characteristics. The Gulf Co-operation Council is an organisation of enormous global significance and has been in a period of change that could have profound implications for the Middle East and the rest of the world.
Over the last few years we have seen a major growth for the economy and noted many of the mega projects related to infrastructure, industrial and real state many of these projects are still being carried on. The population has increased at an astonishing pace, as it has doubled during the last 10 years. More than 80 percent of businesses in the Middle East are family-owned and account for a significant part of the GDP.
A well developed financial sector is the back bone of a competitive business arena. The development and strength of the financial sector in GCC will depend both on economic diversifications in these countries, and on the sector's ability to serve the needs of the wider region. The insurance industry in the GCC is slowly but surely gathering momentum and has significant potential for future growth. Although dwarfed in terms of volume when compared with the other global regions, between 2005 and 2006 the insurance market in MENA region grew at a compounded annual growth rate of 12.5 percent and in GCC countries growing in the excess of 20 percent.
Time to save not Invest
It is evident from the past experiences of recession that people tend to increase their savings and put investment plans on hold in times of economic gloom.
The world has been hit hard by the current global financial crisis. In many ways, this downturn has been far more severe in its depth and breadth in comparison with other such turning points in the economic history of 20th and 21st century. Most sectors of major world economies have taken a huge blow. The collapse or near collapse of once highly respected financial institutions in the absence of prudent monetary policies has led to a credit crunch and loss of confidence across the world. The impact of this is seen in the southward movement of most macro economic indicators such as GDP, employment, investment spending, household income and business profits. In these testing times, people not only witness their wealth being eroded but also live in a constant fear of losing their earning capacity due to threat of job loss or downturn in business.
The Great Depression created a generation of Americans who abhorred waste and considered debt to be the devil's playground. Long after the economy recovered, they hoarded tin foil, saved little pieces of string and insisted on paying cash for their purchases. Recent data from US shows that the savings rate during the last three months of 2008 hit 2.9 percent, which is highest such rate since the year 2002. World over, the trend seems to be similar with people increasingly becoming more cautious in their spending.
Price sensitive
People tend to spend only on necessities and avoid expenditure on luxury goods and services. Industries such as hotels, tourism, automobiles, gold and jewellery, entertainment etc. face the pressure with declining demand. Consumer becomes more price responsive rather than quality sensitive in uncertain times.
Value buying induces consumers to conduct detailed price comparisons before taking any spending decision. Shoppers give up favourite brands, postpone non-essential purchase and bulk buy essential items.
The impact of recession on savings is a complex function of falling property prices, devaluation faced by the stock markets and the overall low level of confidence in economy. Savings rate tends to be higher in an economy which faces increasingly high unemployment levels. High savings rate impacts the aggregate demand of goods and services in an economy. This in turn discourages investments made by firms in their businesses. All this put together leads to a widespread change in the spending patterns in the society. The current downturn may witness for a short term, emergence of a society which places a higher priority on saving for the future, rather than spending for the moment.
Economic uncertainty makes investors risk averse, although plenty of opportunities are available with the correction in prices in most asset classes. The stock market bears the brunt as investors shy away from making investments in such a volatile environment. Widespread selling pressure was witnessed in last few quarters as investors looked to closing their positions to protect against further decline in the prices of their investments. This comes despite low valuations currently available in the market which could reap superior benefits for long term investors. Rather than putting money in one of the most risky class of assets, people are trying to cut down their debts.
Property prices cool down
The slowdown in speculative buying in the real estate sector has helped cool down the prices of properties as banks revise the loans-to-value ratio. The banking industry applies prudent measures in extending credit which affects the money supply in an economy.
Although, governments across the world have taken monetary policy initiative by cutting key benchmark lending rates to boost investments, how this money spurs the growth in investments in various sectors is yet to be seen. Key advice in times of economic uncertainty is to cut down spending on speculative investments and concentrate on value buying. Short-term trading volatility keeps most investors at bay, whereas a long-term investor should look to cherry pick those valuable assets which could reap maximum returns in view of their current distressed prices. Whether real estate, stocks, precious metals or bonds; investment decision should be in line with the individual risk appetite. It is advisable for a risk averse person to avoid putting major chunk of investible money into equities. A portion of available funds should also be allocated to assets such as fixed deposits which reap steady gains.
Good time to start off
Recession could be a good time to start a business if a right type of business is chosen. With careful planning and prudence, one can start any business which involves less initial expense or capital. Tata Motors for example, launched the world's cheapest car Nano in India. In spite of challenging economic conditions, there has been huge response to the car with people queuing up to own this low cost car. The current recession to a great extent will redefine the investment prudence as lack of confidence will rule the sentiments of majority of the population. The investment habits may change forever with people becoming wiser in taking decisions involving money matters. Most of the governments across the world are likely to implement key policy changes in order to make regulatory framework more conducive for the investors.
Key learning for the society will be to avoid spending beyond their means and keep a check on spending habits. From investment point of view, people will revisit the fundamentals and cut down the speculative buying which has been one of the key causes of current turmoil.
The future of InvestiIng: Riddle, mystery or enigma
Investing has always been a game of navigating uncertainty and the only antidote to that is a disciplined research-led investment process with continual adjustments or rebalancing as the macro situation evolves says Rehan Syed.
Perplexed by the recent crisis, many ask me: how will investing change? A tall question, without a short answer. It is safe to predict that in the decade ahead, risk will reprice (it already has), innovation will pause, regulation will rise, leverage will languish and, circling back, risk will be rethought. As the economist, formerly known as 'maestro' Greenspan testified recently, "The modern risk-management paradigm held sway for decades (but) the whole intellectual edifice, however, collapsed" in 2008. The decade ahead will surely be transformational, although we don't fully know yet how. Markets can only be understood backwards, yet we invest leaning forward. One thing is for sure, "We can't solve problems using the same kind of thinking we used when we created them," said Einstein. Much has to change and my prescription follows, centred around trust, innovation, globalisation and investment discipline.Restore trust
This is clearly where to start. A lot was risked and quickly lost in recent years. Not just immense personal wealth but, more importantly, slowly-nurtured institutional trust. Eminent observers have eviscerated the banking industry as 'evil concealed within a widely accepted business model' and an 'administrative economic massacre of such proportion that it constitutes an economic crime against humanity", in the recent stinging words of Shoshana Zuboff, a reputed retired Harvard Professor. As many struggle to understand the chaos and call for a global banking renaissance, the words of Voltaire remind, "God is a comedian playing to an audience too afraid to laugh"; our residual risk is irreverence.
Redirect innovation
In the last quarter century of what was labelled the 'Great Moderation', we possibly saw more financial innovation than in the past century. Much of it was beneficial. Yet the undesirable crept in, leveraged up and overwhelmed. In the past generation, bank leverage ratios rocketed from 5x to 15x with some investment banking divisions running at 50x. The legendary Benjamin Graham's famed 'margin of safety' disappeared from the banks that once preached it. The financial services sector has expanded from four percent of US GDP in 1980 to eight percent of GDP in 2008, from having none of its firms included in the Dow Jones index of 30 to having 3, from weight of below 10 percent in the S&P 500 index to a peak of 35 per cent in 2006 and back down to about 12 percent today. The moral hazard of bailing out 30x leveraged long-term capital management in 1998 came home to roost a full decade later with Lehman and AIG. Innovation must continue globally but on the axes of macro and micro risk management - especially fixing the mismatch between global finance and narrow national regulation. Previously ignored prescriptions on risk management must be revamped and implemented, such as those outlined by Yale's eminent Robert Shiller in his research paper Radical Financial Innovation, published presciently early
in 2004, or by the 'messianic' billionaire George Soros in early 2008 in New Paradigm for Financial Markets, again clairvoyantly penned before Lehman's epic collapse.
Reaffirm globalisation
At the recent G20 summit the G2 mattered most - America and China are key to critically sustaining and extending globalisation. But the largest beneficiary of globalisation heretofore, China, is under pressure to revalue its currency and further open its consumer markets. With its centralised and opaque governance structure, there is justified fear about the corrective course it will pursue if its current aggressive stimulus programme fails to stoke consumer spending which is a key success factor for sustainable recovery. In the battered US, there is a push in Congress for some form of protectionism as payback for the electoral support of the unions; it will be Obama's test and formidable challenge to stand up to the extreme left.
In the heart of capitalism, a credible US public opinion survey in 2009 produced incredible results: that only 53 percent now believe capitalism offers a better economic model and 20 percent prefer socialism. In red-capitalist China, which witnessed over 60,000 social protests in prosperous 2006, what will be the consequence of the 20 million and counting who have lost employment in the past year?
During times of terrible travail, societies make hasty, large and often poorly conceived decisions; Obama's recent 'Buy American' provisions are ominous and incongruent with the fact that over half of S&P 500 company profits are harvested overseas. The blunderous 1930 Smoot-Hawley act was enacted despite over a thousand professional economists and eminent business leaders, including the CEOs of Ford and JP Morgan, lobbying and pleading against it. A painful four years later it was partially reversed with Roosevelt's Trade Agreement as part of the New Deal, but it was not until the GATT agreement of the 1950s that global trade was fully resurrected.
Recommit to discipline
The more things change, the more they stay the same. One constant in the investment world is that discipline pays. Since there are large uncertainties regarding the direction of innovation and the trajectory of global capitalism, our investment portfolios should be sufficiently diversified between risky and safe asset classes, and at all times be cushioned with risk-lowering hedging techniques. Consider the current debate about deflation and inflation and its implications for portfolio construction since the asset classes and financial instruments to own in these widely disparate scenarios differ substantially.
Which camp is fundamentally correct? The pessimists predict a near-Japanese-style extended period of deflation since they view the current stimulus plans as insufficient to bridge the wide macroeconomic output gap resulting in structural overcapacity for years. The optimists expect the recovery to take hold later this year and growth, albeit below trend, to sustain even past the one-time benefits of various stimuli. Yet, these optimists will turn pessimist when inflation takes root a couple of years hence. Which scenario to account for in your portfolio? Depending on your risk profile and investment horizon, you might need a diversified portfolio which incorporates some hedges for both. If extracting retirement income from the portfolio over the next decade or longer is a requirement, inflation hedging and income immunisation strategies should be used.
In conclusion, investing has always been a game of navigating uncertainty and the only antidote to that is a disciplined research-led investment process with continual adjustments or rebalancing as the macro situation evolves. More so than ever before, what lies ahead is unknowable.
As Churchill once opined about Russia, so can we today about the investment decade ahead, "A riddle wrapped in a mystery, inside an enigma". The key is investor welfare.
Banking will go back to basics
Structured deals and tailor-made products had become the hallmark of the banking industry in the past few years. While banking experts rolled out such deals with elan to match customer requirements, they strayed from the conventional banking needs of being safe above all else, with risks adequately covered. And the result has been a crisis that has enveloped the whole world.
"The global recession and banking crisis will push banking back towards the basics of lending and deposits, and away from many of the complex deals which have exposed the inadequate safety nets of the banking industry. Banking will move away from complexities towards the basic structure it began with and, as an industry, will become smaller - fewer lines of business, less staff, and lower, but more sustainable revenues as the complex deals that we have seen in the past years dry up," says Douglas Beal, Partner and Managing Director with The Boston Consulting Group (BCG) in the Middle East.
"If one looks at the main causes of the recession, it comes down to the big housing bubble in the US, and the fact that the underlying assets were used to create such complex products that even the rating agencies could not adequately understand their risks.Qatar Today spoke to Beal when he was announcing the results of the BCG Banking Index 2009, which for the first time includes a special focus on the performance of Gulf Banks.
"One reason why most of the Gulf banks have performed relatively better than the global banks is because the economies of the region are much more sustainable.
"For Qatar, the rich gas deposits provide a stabiliser for the economy and the banking sector. In addition, the banks here have been more prudent when it comes to investing their assets. A third reason is that retail banking makes up 60 to 70 percent of the total banking business in the Gulf - which is higher than many other regions.
"Retail banking tends to be less volatile and, according to our banking index, has more stable profitability than corporate banking. The relatively high share of retail banking in Gulf banks' portfolios have helped to stabilise profits through the crisis.
"When you think about it, the Asian financial crisis of the late 1990s could provide some lessons as to what Gulf banks can do to take advantage of the crisis.
"The Asian crisis caused a consolidation in the banking sector - both domestically and cross border. The resulting larger banks then made investments to strengthen capabilities such as the ability to serve customers consistently across the region, in better risk management, becoming more efficient, etc. As a result, the banks are now much stronger and you have seen a few regional champions emerge.
"This is what the Middle East banks should do today. With better relative performance, I would consider this a good time to look at potential acquisitions. Given the conditions in the global banking sector, Qatari banks should look at this as an opportunity to drive consolidation in the banking sector and look towards further regional expansion - as well as improve their core capabilities."
Focus of the study
The study, covering the period between 2005 and 2008, is part of BCG's annual banking and retail banking indices measured by the development of banking revenues (operating income) and profits for leading global banks. BCG has now customised this index specifically for the Middle Eastern banking markets, with 2005 revenues and profits as starting benchmarks. The index covers the largest banks in Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE, which constitute around 70 percent of banking assets in these countries.
Overall, banking revenues for the largest banks in the Middle East have grown by an annual average of 17 percent over the last four years. Profits in 2008, however, have dropped back to 2005 levels due to higher risk provisions.
While the vast majority of Middle Eastern banks refrained from investing heavily in secured credit facilities from the US, they are facing region-specific risks such as property market risks. However, several of them are more stable due to a traditionally higher share of retail and domestic banking in their overall business portfolio. While traditionally 50-55 percent of global banking revenues stem from retail banking, some of the biggest Middle Eastern banks derive 60-70 percent of their revenues from this business
"We covered banks that make up about 75 percent of the assets in the region, which included Commercialbank and Qatar National Bank in Qatar. Because we were unable to get data that separates retail banking from the rest of the business, we were not able to separate performance in the retail segment from the wholesale segment for Qatar."
According to the BCG index, the revenue situation in individual countries in the Middle East varies:
Saudi banks represent the highest share in Middle Eastern banking and weighting in the indices. They recorded the lowest revenue growth at 9 percent, partially because they experienced their strongest growth already in 2006 at group level as well as in retail banking during the course of the boom in IPOs and brokerage.
UAE and Qatar banks achieved the highest revenue growth over the four years, both at group level and in retail banking, with Kuwait banks following closely behind.
In contrast, profits show a somewhat more troubling picture, as they dropped from their 2007 highs down to 2005 levels in 2008. UAE and Qatar banks were impacted less and lead in profit growth, both in group and in retail/domestic banking. The decline of profits is largely driven by a few individual banks and high loan loss provisions - of which more must be expected.
By Aparajita Mukherjee
© Qatar Today 2009
