Stock market investors have had a rough ride in recent months. In mid-2015, the Dubai Financial Market (DFM) General Index was trading above 4,000 points, but it has corrected down to below 3,000 points by the end of 2015 year. It has been a similar story on the Abu Dhabi Exchange (ADX), where the main index has fallen from 4,800 points in August last year to around 3,800 points in the opening weeks of this year.
The performance of the two main UAE stock markets are in line with what has been happening on other similar markets around the world. The MSCI Emerging Markets index, which tracks bourses in 23 countries representing 13 per cent of world market capitalisation, has been on a similar trajectory over recent months.
The causes of this downturn vary from market to market, but there are some common concerns that are driving down share prices. These include fears that the slowdown in China will gather momentum and the low growth in many developed markets. In the Gulf region, worries about the impact that low oil prices will have on the local economies are also preying on the minds of investors.
Of course stock markets by their nature rise and fall, and not always in response to the underlying health of the companies listed there, but also linked to the general mood of confidence in the future, or not. Investors who have put their money into the financial markets for their long term personal goals, need to examine the markets for opportunities and stay the course, without panicking.
The most important element that any investor needs to bear in mind is how much appetite they have for risk. Once that has been decided, they can then start to build up a portfolio that matches it. Banks and other professional advisers can help with this process, by conducting suitability exercise. However, this is not a one-off process. Risk appetites change over time, based on factors such as an investor’s age, their personal circumstances and if there are changes in their personal goals.
For investors with a higher appetite for risk, the more volatile market environment that we have at the moment might well be seen as an opportunity. With lower prices, it means they are able to buy shares at a lower price than would otherwise be the case, in the hope that as the market recovers in the future they can make a higher return.
“Depending on how far a client is from the time at which the money is required, volatility can be a good thing,” says Sachin Patki of Abu Dhabi Commercial Bank (ADCB). “Clients with a very long time horizon should look at volatility as an opportunity to get value in their longer term portfolio In other words, when markets are down, clients are able to buy more of the portfolio they need with the same amount of money, known as Dollar Cost Averaging (talk to your Relationship Manager about this). Over a full market cycle of correction and recovery, this helps investors get better value in their portfolios”
Some investors will not have that luxury and will be working to a shorter time horizon, perhaps because they are closer to retirement, or are planning to use their capital for its intended purpose. For such people it is important to adjust the make-up of their investment portfolio to shield them from market downside as much as possible. Even at times of wider market volatility, some instruments tend to be more stable than others.
Having an investment portfolio that is closely aligned to risk appetite will help an investor ride the inevitable ups and downs of a stock market cycle. It will also help them resist the pressure to sell when prices are falling. In many cases, investors will be tempted to do this with the aim of reinvesting later on, when prices have fallen further. But trying to predict the bottom or top of a market cycle is impossible and could well end up denting an investor’s returns over the longer term.
For investors there are a number of tools and investment strategies available which can help them to cope with periods of volatility. For those with a lower risk appetite, products known as ‘capital protected structured notes’ may be most appropriate. These reduce the risk of any losses to an investor’s capital but provide more modest returns than other investment approaches. For younger investors or those with greater risk appetite it may make more sense to use a regular investment programme which will periodically deploy specific amounts of money regardless of what is happening in the market at the time.
For everyone though, the key point is to regularly evaluate their risk profile and then, perhaps with the help of professional advisers, following an appropriate investment strategy to ensure that they have a portfolio which best suits their needs.
“Market volatility is the only constant in financial markets’ is a common market refrain. We are living through a period of high volatility at the moment but volatility is inherent to financial markets and also offers risks and opportunities- every investor has to decide what is suitable for them.” says Sachin Patki of ADCB. “While having a long-term approach and holding a balanced portfolio are essential, it is even more important for clients to choose a portfolio that suits their risk appetite. This way, when volatility inevitably arrives, clients are able to handle the daily ups and downs of the market, without letting their emotions get the best of them. Once investors anticipate such periods of volatility, they are much better able to handle them.”
This is a sponsored article written for Abu Dhabi Commercial Bank
Copyright: UMS International Fz LLCTheme