Sell out and wait for better times to reinvest seems like a logical decision in an extremely volatile war headlines-driven stock market, but that is exactly what investors should not do if they want to preserve the long-term value of their investments, analysts say.
market analyst at eToro
Staying invested during crises, even through wars, is an extremely difficult but correct approach for investors seeking portfolio appreciation beyond the short-term volatility and market cycles.
"The instinct to step aside and wait for calmer conditions is understandable, but history shows that approach often does more damage than the volatility itself,” Josh Gilbert, market analyst at eToro, told The National.
“Whether you have been an investor for one year or 10, seeing your portfolio in the red is always uncomfortable, but panic selling can have real long-term implications for portfolios.”
The worst time to make investment decisions is when “fear is at its highest, and that is exactly where we have been sitting” amid worsening geopolitical risks as the war in the Middle East shows no signs of abating, he added.
Charu Chanana, chief investment strategist as Saxo Bank, said during sharp market sell-offs, investors are tested twice: first, through falling prices and, second, through the urge to do something dramatic.
“That second test is often the more dangerous one …. the biggest risk is often not the market itself, but the investor’s emotional response to it,” she said.
Staying invested through the volatile market cycles make sense for investors as the long-term returns are not usually destroyed by one bad sell-off, Ms Chanana said. “They are damaged when fear turns volatility into bad decisions.”
Cross-asset chaos
The Middle East has plunged into its worst conflict since US and Israel launched their bombing onslaught on Iran and Tehran started retaliatory strikes against its Arab neighbours.
Investors across continents are facing hard investment decision since the missiles, rockets and drone strikes in the Middle East started on February 28.
It is a cross-asset chaos, with oil prices jumping more than 20 per cent in a day and losing all momentum the next. The effective closure of the Strait of Hormuz, the choke point through which 20 per cent of the world’s global crude supply passes, has triggered alarm bells of an impending global energy crisis in oil import-dependent Asian economies.
The repercussions for the global economy are equally daunting and the International Monetary Fund is already warning of a surge in inflation and a dent to global growth if the Strait remained closed and the conflict prolongs.
Financial markets across the globe have felt the reverberation and equity markets in the six-member economic bloc of the GCC, were no exception. Being right in the middle of the conflict, equity indexes have swung, despite initial suspension of trading in some markets and reduction in limits by how much stocks could decline in a day.
Headlines of war have, by and large, driven investor sentiment, with markets pretty much towing the oil price swings as energy infrastructure in Iran as well as in the Gulf region comes under attack.
Brutal stretch
Stocks in the UAE have seen more volatility than their Gulf peers.
The benchmark equities index of the Dubai Financial Market fell around 17 per cent after reopening on March 4, with six straight days of losses, before clawing back some lost ground during trading on Tuesday and Wednesday.
The main measure of Abu Dhabi Securities Exchange also lost about 6 per cent before a slight recovery during the past two days.
Trading on Dubai and Abu Dhabi exchanges, as well as Nasdaq Dubai in the Dubai International Financial Centre, were suspended on March 2 and March 3 to stem volatility, UAE market regulator, the Capital Markets Authority, said at the time.
Bourses in Saudi Arabia, Qatar, Kuwait, Oman and Bahrain have also seen volatile trade and accumulated losses since the break out war in the region.
Equities in the UAE, as well as in the broader Gulf markets are facing pressure from multiple fronts including risks to their economic transformation agendas, strikes on energy infrastructure, potential impact on tourism and aviation as well as logistics and trade disruptions. Investor sentiment is also dampened by the risk to the region’s global status as a safe and stable base for business and investment if the conflict prolonged.
“That creates a more complex set of headwinds compared with many other regions,” Mr Gilbert said. “It has been a brutal stretch for GCC markets, and there is no way to sugarcoat it.”
Property and banking stocks
In the UAE, property and banking sector shares have led losses.
Emaar Properties, the biggest property developer in Dubai as well as Aldar Properties, top listed-developer in the UAE capital, have weighed the respective indexes down.
Emaar and Aldar have dropped close to 5 per cent, the maximum limit by which a stock can fall on daily basis, on most days since trading resumed on March 4.
The two developers have been at the forefront of growth of the UAE’s property sector, which has expanded at a record pace since bouncing back from the Covid-driven slowdown. The real estate sector is among the main drivers of the UAE’s non-oil economy and is central to the government’s agenda of diversifying its economy away from oil.
Aldar and Emaar, along with a host of listed and private sector developers, have launched hundreds of multibillions dollar projects over the past few years in the emirate, attracting investors from around the world. Some of the mega projects in Dubai and Abu Dhabi in recent quarters were sold within days of launch.
Wary stock investors, however, are reducing their exposure to the property sector shares, fearing a prolonged war in the region will dent the prospects of growth.
Given the escalation in geopolitical headwinds, oil supply shocks, as well as the potential of tourism outflows and slowdown in the hospitality sector are all “pressuring one of the market leaders Emaar, Razan Hilal, market analyst, at Forex.com, told The National. “The equity market is naturally expected to extend a corrective phase.”
Banks including Dubai Islamic Bank and Emirates NBD in Dubai, as well as lenders in the capital, including First Abu Dhabi Bank, Abu Dhabi Commercial Bank and Abu Dhabi Islamic Bank have also seen a drop in their share prices.
Most lenders in the UAE are exposed to mortgages market and regularly fund new commercial and residential property projects in the county.
Buying the dip
Real estate prices may begin to fall. However, the fundamentals of the UAE economy, which emerged stronger from crises, including the 2008 financial meltdown and the 2020 pandemic, remains strong, Ms Hilal said.
This current market correction could offer investors “dip-buying opportunities once resolutions begin to appear in the headlines” she added.
However, Mr Gilbert said normally in a sharp sell-off the market does sees “dip buyers stepping in aggressively”, but the appetite may be more cautious this time around, given how quickly the outlook can shift.
“Rebounds are likely to happen, but that does not mean the risk has passed”, he said.
“Markets will remain highly reactive to developments in the Middle East over the coming days and weeks, so volatility is likely to remain part of the landscape.”
