Trader profile: Still buying on record-setting US stocks
Name: Nadi Bargouti
Position: Managing director of asset management at Emirates Investment Bank
Years investing: 15
What is the asset class and geography you are focused on?
At Emirates Investment Bank, private banking clients have their own unique approach to investing and it is up to us to manage both risks and opportunities. We therefore apply a balanced, multi-asset class approach to enhance return and mitigate risk. Currently, equities remain relatively attractive given the extremely low yield environment and subdued inflation levels. Within equities, the US is our top geographic pick at the moment as economic conditions continue to improve and corporate earnings steadily grow. US equities today offer an earnings yield of 5.5 per cent, more than double the yield on US 10-year treasuries. In Mena, with the recent sell-off, we are starting to see value in many GCC equities, particularly in Saudi Arabia where indiscriminate selling triggered primarily by declining oil prices drove all sectors down to relatively attractive levels.
What is the outlook for the month ahead?
We expect markets to remain range-bound with risk to the downside given the lack of real catalysts to move markets in either direction and the fact that some investors may elect to lock in profits ahead of the year- end. Conflicting economic data and diverging central bank policies coming out of Europe, the US and Japan will lead to increased investor uncertainty and sustained market volatility. In the region, low oil prices continue to weigh on market sentiment, with the Saudi Petrochemical Index being the country’s second-worst performing index. However, a strong IPO pipeline, particularly in Saudi Arabia and the UAE, will attract ample liquidity into the markets.
What are the main risks, either upside or downside, to the outlook?
Escalating geopolitical tensions between Russia and the West, in addition to a sluggish economic recovery in Europe, continue to act as headwind to global growth. In the GCC, lower oil prices, if persistent, may have an adverse impact on future government spending and infrastructure projects as some oil-dependent governments will have to scale back, or borrow to finance those projects to avoid tapping into their reserves.
What is the best investment at the moment?
We continue to favour US equities as economic indicators continue to point towards a steady recovery across many sectors. In particular, we expect manufacturing to benefit from low energy prices and labour costs, while banking will benefit from an eventual increase in interest rates. We also see value in US high-yield corporate bonds on the back of improved credit profiles and yields more than compensating for implied default rates. In the GCC, banking, consumer staples and discretionary sectors in the UAE and Saudi Arabia offer attractive returns and yields at current levels.
What was the best investment you were ever involved in?
In June 2012, we were prompted to look at Google after the Facebook IPO, which came out trading at 100 times earnings compared to Google’s 18 times, and Google had a much clearer business model and better fundamentals. We likened Google to a consumer staples company where it had become a staple for a majority of internet users worldwide. We bought the company back then at US$290 and recently exited the position at $570 during the October 2014 global equity sell-off. We continue to like the future prospects of the company and are monitoring the current price levels as a potentially attractive re-entry point.
What was the worst?
We invested in the mining sector in mid-2012, assuming that a healing global economy would support steady demand for commodities going forward. At the time, stock prices for many mining companies had taken a significant hit since their October highs in 2011, and we assumed that their depressed stock prices had already priced in the poor fundamentals of the mining sector. Many of the companies have low debt profiles and strong free cash flow generation ability, and we believed that their dividend yields would support their stock prices. The global economy turned out to be weaker than expected and we decided to exit the sector at stop-loss levels.
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Published: December 7, 2014 04:00 AM