1. 29Saturday,
September 12, 2009
Money
Sanjoy Sen
Head of Consumer Bank, Citibank, Middle East, Dubai
“I do not think that we had to unlearn anything in terms of the prod-
uct space or the markets in the consumer banking space, because
the financial crisis was precipitated by a series of events which led
to a loss of confidence in the global markets, liquidity tightening up
and ultimately the failure of Lehman Brothers. But one must think
back to the failure of Bear Stearns and visualise that the actual sei-
zure in the financial markets started when the housing market start-
ed going south in the US and then globally. That’s when the credit
scenario seized up.
“At the retail level, we were not selling these exotic structures,
but pretty plain vanilla products which have been around for a long
time, whether it be mutual funds, structured notes, insurance products, bonds or de-
posits. I think our strategy continues to be the same — built around this open archi-
tecture platform — but, we are paying heed to the fact that customers have become
conservative and do not want to take chances any more.
“Current equity and credit markets seem to offer attractive opportunities, as down-
side risks to economic growth dissipate and de-leveraging pressures ease. Yet even as
opportunities surface, it is crucial to remember (and we strongly advocate it) that the
key to capital preservation and growth for many investors remains in diversification,
‘dollar cost averaging’ and/or principal protecting portfolios to better balance short-
term volatility and long term opportunities. And finally, a proper evaluation of one’s
risk tolerance.
“A disciplined investment process, emphasising strong or rising free cash flow, profit
margin expansion, attractive valuations, positive changing internal dynamics, incre-
mental market share opportunities, and strong management can help investors main-
tain clarity in volatile markets.
“There’s no secret recipe to investments. In addition, intrinsic intuition such as
‘knowing when to say it’s enough when valuations or vital factors exhibit and sell into
strength to capitalise an investment profit’ and market experiences are the two most
pertinent guides to gauging markets’ likely direction and performance.”
— Compiled by Gaurav Ghose,
Financial Features Editor
I
t’s been a year since the financial crisis struck the
US,themajorcatalystofwhichwasthebankrupt-
cy of investment banking giant Lehman Brothers
on September 15 2oo8. As the aftershocks rever-
berated around the world, stock markets collapsed,
venerable banking houses fell and the international fi-
nancial system ground to a halt. With corporations slid-
ing into bankruptcy and job losses mounting, countries
across the world fell into recession. No one was spared
the effects of the crises. Looking at the remnants of
their assets, investors wondered what they should have
done differently. Gulf News asked fund managers and
analysts about the lessons learnt, whether they had to
unlearn anything and if they had a different strategy as
the markets unravelled.
Tariq Qaqish
Fund Manager, Al Mal Capital, Dubai
“The crisis really tested my assumptions and thinking.
What I thought was granted became invalid, especially
the ‘too big to fail’ ideology. I learned to keep my eyes
open and believed that there will always be opportuni-
ties in good and bad times. Some themes which came
to the fore:
n ‘Nowhere to hide’: All previous analysis on low cor-
relation of equity markets across the world failed. What
most people missed is the economic correlation and
the strong interaction among international financial systems. I was one
of the people who believed that our region is more resilient to what is
happening to the international world due to the low foreign ownership.
Nevertheless, I did not expect the strength of the crash.
n New kids on the block: Shorting regional equities is considered fairly
new to this region and has intensified the collapse of regional markets.
Until this is regulated, analysts will face difficulty in understanding the
behaviour of regional equity markets.
n Is the glass half empty or half full? Always keep your focus on key factors
that change macro trends. Our funds were one of the few who participat-
ed in the recent equity rally in the region. We kept our minds as neutral as
possible and that was not easy when everybody around you was negative.
We accepted the fact that corporate earnings will drop year on year basis,
but kept examining sequential figures and core business growth.
n Too big to fail: This myth was tested again and proved to be a fairy tale
that should be wiped out from our thoughts.
“Was there a different strategy? Actually none. Our strategy during the
market collapse was to reduce equity exposure and invest in themes that
we believed would perform well even during recession time. We main-
tained high exposure to consumer staples and transportation sectors. We
also made sure to raise the cash cushion in our managed funds. The two
funds I am managing were the best performing in 2008 among their peers.
I always kept in mind to invest more in fixed income, however the low
liquidity of the available issues in the region did not encourage me to do
so. In addition, during this crisis, bonds were reacting in the market, to a
certain extent, like equities.”
Abdul Kadir Hussain
Chief Executive, Mashreq Capital, Dubai
“I think people really learnt how interconnected and
global financial markets truly are. What started out as a
specialised mortgage crises in the US, mushroomed to
global proportions due to the leverage in and the inter-
connectivity of the capital markets.
“I think the other lesson learnt was that derivative
structures are not for everyone. There maybe a place
for them in the market, but they are not a basic asset
class like equities, bonds or real estate etc. I think peo-
ple had started treating them as such. I think you learnt
that when product returns are based on statistical correlations holding
then those products can become nightmares very soon if those correla-
tions break down.
“On the other hand, if you hold an investment with fundamental value,
you may have to adjust your investment horizon and take mark to market
losses, but value will eventually return to those investments. This is seen
in the fact that most equity and bond markets have now returned to more
normal valuations, yet a lot of the derivative structures that were created
based on these underlying asset classes have blown up, never to return.
“I think if people could have foreseen the collapse of Lehman in Sep-
tember, a lot of people would have recognised losses and gone to cash be-
fore the collapse. Clearly everyone was shocked by how severe an impact
the fall of a significant financial institution can have. Conversely, I think a
lot of investors remained shell shocked and sidelined for a lot of this year
even though they knew the markets were oversold
and offered excellent value. I think upon hindsight,
a lot of people would say that they should have had
more respect for the coordinated responses of the global
central banks and governments and should have gotten back
into the market earlier in the year than they did in order to cap-
ture that value, which has largely now gone.”
Shakeel Sarwar
Head of Asset Management, Securities and
Investment Company BSC (SICO), Bahrain
“I believe that the last year’s financial crisis was
a type of event that perhaps happens once in a
century. No living investment professional has
seen anything like it before — markets liter-
ally remained in a free fall mode for about six
months. Many emerging and GCC markets
lost between half to one-third of their values
during this period, raising questions wheth-
er such markets should actually be classi-
fied as an asset class or not.
“Although I am an old-fashioned long-term value type of
an investor who believes in the merits of diversification,
what this crisis has taught me is that ‘long-term invest-
ing’ and ‘diversification’ have their limits and may not
always work. One needs to have a clearly defined
loss tolerance or some sort of a ‘stop loss’ strat-
egy. Statistically, avoiding losses in bad years is
more important than producing excess returns
in good years in order to generate positive and
above average long term returns.
“As I told you, it was an unprecedented
crisis. All asset classes literally collapsed.
Whether you were a long-term value in-
vestor or a speculator, the results were
not much different. The only strategy
that worked during this period was
to cut your losses and go into cash or
gold. I did have a stop loss strategy
which helped me to contain my losses.
Resultantly, I was down 30 per cent
for the year versus between 60-70 per
cent for the benchmark and most of my
competitors. However, the fact that my
fund lost almost one-third of its value in
a year hurts. Had I strictly followed and
implemented the stop loss strategy that
we have in place, I could have done even
better.”
Mohammed Ali Yasin
Chief Executive, Shua’a Securities, UAE
“The speed of the meltdown took me by surprise. For
the first time, no one in the world could predict where
the bottom is, or when we will hit it. It was unique in the
sense that everything crashed at the same time, there
was nowhere to hide. No matter how much you diversi-
fied your investments, they all went down! Whether in-
vested in equity markets, or real estate, or commodities
(gold, oil, agriculture), it all went down!
“Some of the biggest trading desks in the world’s larg-
est investment banks couldn’t cope with the selling
rush and stopped taking phone orders, money transfers
that used to take 24 hours to happen took three weeks! My belief in the
robustness of the world financial system was destroyed.
“In my personal experience, I benefited from my calmness in assessing
the fast moving circumstances around me, and not follow the panic herd!
Based on that, I looked at the macro-factors, past historical economic
crashes in the area, studied the real facts and discarded the rumours and
silly stories going around by people who lacked the knowledge and real
understanding of the UAE economy, and more importantly its social ties.
“I always believed that, ‘The UAE, as a whole, will come out of this cri-
sis.’ They have done it before, and under its wise leadership they were
able to do it again. And they did.
“Also, there is a limit to ‘how long, should long-term investments last’!
“One of the first things that need to be understood is that too much
leverage was one of the main reasons for what we saw last year and what
people need to know going forward is that borrowing needs to be always
contained within manageable parameters. Over-borrowing or over-lend-
ing exposes entities and investors to high risks and makes them vulner-
able to economic downturns that could lead to bankruptcy. In this crisis
we have seen countries go bankrupt.
“Another thing learnt is when lending clients against collateral, how liq-
uids is that collateral? That is, how fast can you sell it if margin calls occur
and when economic crisis hits the economy. Also, there is nothing in the
world called capital-guaranteed risk, as the guarantor could himself fail
and go bankrupt, like in the case of Lehman Brothers, where they were
one of the biggest financial institutions providing tools to allow capital
guarantee investments in the world.
“From the point of a view of a brokerage company, it must be pointed
out that there were lots of companies that were adopting wrong practic-
es of trading of clients accounts daily at a high leverage levels, ‘churning
of accounts’, which lead to large losses to investors. So those who over-
leveraged have really suffered. So one lesson for
brokerage companies is, ‘Don’t over-leverage cli-
ents to make short-term profits.’ And as an investor,
over- leveraging leads to loss of capital. Whatever mon-
ey you risk in investing is money that you don’t depend on
for your livelihood and you are not worried to lose.
“In answering the question on anything you would have done
differently, my answer is: ‘It’s too hypothetical, and means nothing.’
I am sure most people replied ‘we would have invested much less in
real estate’ and ‘we would have sold all our investments’! Easier said than
done.
“I guess the philosophical answer would be, ‘Be less greedy!’”
Deon Vernooy
Senior Executive Officer, Emirates Investment Services,
Dubai
“The financial market crisis of 2008-09 confirmed
many of the lessons embedded in financial market his-
tory. Most importantly, investors have a tendency to
become completely irrational at the extremes and that
it creates opportunities.
“Secondly, risk has a price, and thirdly, that liquidity
has substantial value. Many fund managers and ana-
lysts may have forgotten these important lessons and
the crude reminder will stand them in good stead in
the future.
“It’s very easy to pick holes in any strategy — with hindsight. However,
many managers and investors, including ourselves, have certainly taken
the reminders about the price of risk and liquidity on board. Many man-
agers and analysts may also spend more time in future on assessing the
real capabilities and governance procedures of external service providers
to avoid the Madoff-like pitfalls.”
Farhan Mahmood
Executive Vice President, Morgan Stanley, Saudi Arabia
“For me, the best thing about being in the financial
markets is that every day is different. You come to the
office with a view based on a set of assumptions, but
guess what — the markets tend to surprise. So you con-
stantly need to keep checking assumptions and fore-
casts.
“Specifically on Saudi Arabia, although the impact
has been muted, the crisis has shown the high level of
correlation this market had to global markets, despite
Saudi not being completely open to foreign investors.
“Historical correlation of 0.35 to emerging markets didn’t hold as all as-
set classes across all regions collapsed.
“In terms of learning, I stick with the basics, keep things simple and
focus on the fundamentals. I think that has worked well, albeit there were
times in the interim when my conviction was challenged!
“Looking back, I feel that the last quarter of ’08 and first quarter of ’09
were the times to increase risk appetite, not reduce it. It was clearly an
exceptional situation where fear and panic had gripped the financial mar-
kets and there was a crisis of confidence.”
Oneyearon:
Lessons
learnt