After almost a 10-year bull market, October was the worst month for global stock markets since October 2008, so how should investors respond?
Was it some kind of a flash crash that will soon be a distant memory as stock markets resume their long-term rise? Or have we just passed a crossroads with a major bear market ahead with share prices generally heading down, and not up?
Was this perhaps the '1937 moment' hedge fund manager Ray Dalio alluded to in his timely new book Debt Crises? Back then the Fed raised interest rates - as it has done three times this year - and stocks plunged 60 per cent in value and took a decade to recover.
Last month global stock markets peaked in the first few days and then lost more than $2 trillion in value. Even Warren Buffett lost $4bn on his Apple shares. There was nowhere to hide in stocks.
But when I read an advisory in a UK newspaper last week about how a recent widow should invest her $1 million legacy I was appalled by financial experts still trotting out a combination of real estate and managed funds.
Any professional adviser ought to be aware of the danger of trying to catch a falling knife right now. In this case, stock and housing markets get scared by rising interest rates.
Sitting on cash is the only way to get a guaranteed benefit from rising interest rates. Doing nothing is much the best option.
Of course there is nothing in this investment strategy for the middleman. Indeed, that is why they almost never recommend it. Would an adviser actually go out and buy a managed stock fund in a falling market? By the time they have invested they would have lost say five per cent on commissions, and much more if the market continued to drop.
Take global real estate, outside of oil producing nations, it’s the same story. If you can see it is still declining in value then you rent and don’t buy, at least until the market stabilises.
There is a huge sum of money involved with property, usually mainly borrowed. This loan remains the same as house prices decline, so it is your deposit that gets wiped out first.
During my time as a financial journalist I’ve been through three major financial crises: the 1987 crash, the 2000-01 dot-com crash and the 2008-09 crisis.
In all three cases the central bank’s response to this sudden and seemingly unexpected event was a big cut in interest rates.
That steadied the ship and stopped markets plunging further, although the recovery phases took longer and longer.
In 1987 I was based in London and that drop in interest rates pushed housing into a boom, until it too crashed in 1991.
In 2000 I was a budding dot-com entrepreneur in Dubai but fortunately had a very robust business model and could ride out the storm. Plus, at the time, Middle East was behind in IT development that the dot-com crash did not have a great impact.
But 2008-09 was a different matter. An oil and real estate boom came to a sudden stop and shook the region.
Those who survived the initial shock moved adeptly into local bonds then local real estate and finally local stock markets to rebuild and enhance their fortunes.
I was very early in tipping Emaar Properties as a recovery stock. Those who bought and held made 750 per cent within four years.
At that time the UAE bond market was less developed than it is today and it was mainly local family offices who spotted that opportunity and knew how best to profit from it.
And after the Dubai World debt restructuring was signed off in late August 2011, that was the signal to buy local property at bombed out prices.
Nobody knew then that the Arab Spring was coming, which resulted in a huge increase in demand for housing in the UAE and $100-plus oil prices for a three-year period.
But it definitely paid handsomely to be optimistic in the UAE after the storm of the global financial crisis had settled down, provided that you still had some cash to hand. How do things look now?
BlackRock’s iShares MSCI UAE ETF is a tracker for 40 UAE stocks. It’s currently down from $25 to $15 over five years, and this autumn’s global stock market correction might produce a bottom worth buying.
The Dubai Financial Market General Index is down 18 per cent this year and trades on a price-to-earnings ratio of just 7.5. Meanwhile, Q3 regional oil revenues were up 26 per cent, local employers are hiring again, and population growth was double housing output this year.
Today, US sanctions on Iran came into effect that could reduce global oil output by the most since the Libya Crisis in 2011. Higher oil output in the UAE and higher prices will surely follow.
Emerging markets do tend to be more volatile than the more developed markets of the industrialised world. But they do also offer the chance to make higher profits if you can get your market timing at least somewhat near to being right.
UAE residents have the extraordinary privilege of living in a wealthy country with greater internal stability than many due to natural resources, strong leadership and large sovereign wealth funds. The worst of the oil price cycle is also clearly behind us.
Foreign investors do not generally appreciate these advantages, and so drive UAE asset prices up and down like an unstable country in say Africa or South America.
Therefore, my advice to readers would be to think local and not global in the coming recovery but keep your powder dry in cash during the current sell-off, as it is probably not over just yet.
This is not as easy as it looks. The US dollar is itself another asset class in a temporary bubble.
Eventually, and it may not take too long, the US will reverse from its hawkish stance on interest rates. When that happens the US dollar ‘could easily drop 30 per cent’ to quote Ray Dalio.
How do you hedge against that happening to your savings? Well, go back to the financial crisis and it was precious metals that soared in value first as the dollar weakened.
It’s no coincidence perhaps that the gold price jumped in October when stocks were crashing. The market is thinking ahead a few quarters, and so perhaps should you.
If you want to stay virtual then try the Perth Mint’s new gold exchange traded fund (AAAU) or the GraniteShares Gold Trust ETF (BAR), both with lower fees than their bigger rivals; or the Sport Physical Silver Trust (PSLV).
Peter Cooper has been writing about Gulf finance for more than two decades