Forbes Middle East


Risk Aversion

Hannah Stewart
Risk Aversion
The size of the global financial market reached $150 trillion in 2011 providing a clear picture to investors looking to buy shares. In the Arab world, financial market performance and size remain below expectations, failing to exceed one trillion dollarsa figure which represents only a small percentage of the regions economy. However, the performance of Arab financial markets did not differ greatly to that of other financial markets across the globe. 

Against this backdrop, we aim here to provide support across a number of technical and financial areas for those who wish to invest in financial markets. In doing so, we look to advise investors on the best ways to take advantage of the opportunities presented by imbalances in financial markets by offering eight general tips that are designed to help encourage the right stocks-based decisions in 2012.

1- Seize opportunity from crisis

Crises of all kinds generate storms in financial markets, producing profound effects on the prices of shares and commodities - sometimes in the investors favor. While these storms can create opportunities not to be missed, some key factors must be taken into consideration, such as inflation and interest rates, dividends, book value and expected price-to-earnings ratio. Taking advantage of the opportunities presented by drops in the value of a range of assets and commodities must be approached with caution. For example, most Egyptian stocks are currently priced below their market value and are therefore considered an attractive investment opportunity. However, in an unpredictable market, buying such shares brings with it the risk of losing everything you in just one day. To this end, spreading or diversifying risk is vital.

2- Identify flexible sectors that have demonstrated recovery during crisis

Only certain sectors with a demonstrable degree of flexibility have shown noticeable recovery from financial crises. In contrast to most other regions of the world, the banking sector in the Arab world is one such sector, with success attributable in part to the precautionary measures taken by central banks. 

The petrochemical sector is one of the safest sectors in GCC markets with the oil industry witnessing significant success in 2011 demonstrated by prices that reached the $120 per barrel mark. Furthermore, the petrochemical sector relies on a range of other manufacturing industries related to oil which have also benefited as a result. 

The telecommunications sector is another safe option that generates stable dividends, particularly given its dynamism and centrality to our everyday lives. Conversely, one sector to avoid is insurance, particularly in regions that are prone or vulnerable to unrest. Losses incurred by insurance companies during times of economic, political or social unrest would push financial indices to their lowest level.

3- Conduct in-depth research before investing in a company

It is necessary to examine a wide range of facts and figures related to a company in which you would like to invest your money. There are a plethora of issues to be taken into account, one of the most important being share price sensitivity; the more share price sensitivity rises, the higher the risk. When researching into a company, it is important to check that it conforms to recognized standards, and to examine company performance from the previous two quarters including quarterly corporate earnings and all related data such as profits, price-to-earnings ratio, acquisition percentages and structure. Furthermore, it is important to establish whether the company or its affiliated companies have any commitments or operations in unstable areas. When speculating, be cautious and use a portfolio of companies involved in diverse sectors.

4- Seek a long-term investment and verify earning standards

After examining the company and the sector in which you wish to invest, think carefully about the life cycle of the investment process before you start buying stocks. A long-term investment in a company with a track record of stable financial performance normally lasts between three to five years. This is particularly true of stocks with good reputations and quality derived from the companys assets. Investment in companies that fit such a profile offers returns that meet your risk size and curbs short-term speculation. Furthermore, companies that are concerned about dividends and the quality of information that is delivered to the investor usually provide the transparency you are looking for.

5- Be cautious of the Option market

Derivative financial tools such as options offer solutions for investors to prevent capital losses and to generate fast profits. Options establish contracts giving their holders the right, but not the obligation, to buy or sell a given stock at a specified price during a specified period of time. The value of derivative contracts depends upon the characteristics of an underlying asset (stock) and is subject to financial analysis. 85% of their assigned value is based on estimations developed from analysis of market studies; hence, derivatives are often highly risky and vulnerable to loss. Unless you are familiar with options and how they function, it is advisable to avoid them, as one wrong decision could result in unintended consequences. Do not risk your money on options portfolio, unless you are fully aware of the rate of return and risk.

6-Do not be influenced by rumors circulating in markets

Ignore rumors that circulate the market, particularly prior to the release of quarterly results for listed companies. Such rumors are often motivated by the vested interests of certain actors and are aimed at misleading other investors or influencing their decisions. Some of the investors that follow rumors spread across global financial markets are often already privy to relevant information or hold related interests. 

To counter the risk of rumors, all you have to do is be objective; take the advice of a neutral, independent entity that gives a highly professional opinion and let numbers and financial indices lead your investment decision. Price increases sparked by rumors are artificial. True to their intention, rumors create a bubble that may explode at any moment inflicting damage on innocent investors and the market index, while profiting those who initiated them. Financial markets authorities take a hard stance where rumors are concerned, viewing the circulation of rumors and related activities as crimes, and imposing penalties on those proven to be involved.

7- Think twice about margin financing

Margin financing is a common financial instrument that is used by brokers to trade in financial markets. However, this instrument should be used cautiously due to the accompanied risks such as declines in stock values or drops in a financial index to below the support level. 

Margin financing involves borrowing money from a stock broker or bank in order to buy securities against an expected profit margin and marginable securities which count as collateral. With this in mind, it is recommendable that you do not use this tool in excess regardless of whether or not the information upon which you base your decision is confirmed.

8- Diversify your portfolio making sure it contains Sukuk

Sukuk is an investment derivative complying with the Islamic Sharia law and is subject to regulation by an Islamic organization and an investment committee formed to set relatively secure investment strategies. Sukuk certificates proved to be effective and flexible during the global economic imbalances in 2010 and 2011, and may therefore serve as a safety valve for your portfolio where the risk ratio is stable. The Sukuk market has seen growth worldwide due to the increased demand for Islamic finance instruments. Reflective of this, Sukuk issuance is expected to increase by 30% to break the $200 billion mark by the end of the year.

Sukukor Sak in the singular form is proof of the speculators right to a share of the divisible profits generated by speculations. Therefore, diversifying your portfolio using this instrument serves as a buffer against any unexpected turmoil.
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