Sanjoy Sen - Gulf News - On Wealth Products after the Finanical Crisi - Sep 2009


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Sanjoy Sen - Gulf News - On Wealth Products after the Finanical Crisi - Sep 2009

  1. 1. 29Saturday,September 12, 2009MoneySanjoy SenHead 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, becausethe financial crisis was precipitated by a series of events which ledto a loss of confidence in the global markets, liquidity tightening upand ultimately the failure of Lehman Brothers. But one must thinkback 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 creditscenario seized up.“At the retail level, we were not selling these exotic structures,but pretty plain vanilla products which have been around for a longtime, 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 becomeconservative 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 asopportunities surface, it is crucial to remember (and we strongly advocate it) that thekey 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’srisk tolerance.“A disciplined investment process, emphasising strong or rising free cash flow, profitmargin 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 intostrength to capitalise an investment profit’ and market experiences are the two mostpertinent guides to gauging markets’ likely direction and performance.”— Compiled by Gaurav Ghose,Financial Features EditorIt’s been a year since the financial crisis struck theUS,themajorcatalystofwhichwasthebankrupt-cy of investment banking giant Lehman Brotherson 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, countriesacross the world fell into recession. No one was sparedthe effects of the crises. Looking at the remnants oftheir assets, investors wondered what they should havedone differently. Gulf News asked fund managers andanalysts about the lessons learnt, whether they had tounlearn anything and if they had a different strategy asthe markets unravelled.Tariq QaqishFund Manager, Al Mal Capital, Dubai“The crisis really tested my assumptions and thinking.What I thought was granted became invalid, especiallythe ‘too big to fail’ ideology. I learned to keep my eyesopen and believed that there will always be opportuni-ties in good and bad times. Some themes which cameto the fore:n ‘Nowhere to hide’: All previous analysis on low cor-relation of equity markets across the world failed. Whatmost people missed is the economic correlation andthe strong interaction among international financial systems. I was oneof the people who believed that our region is more resilient to what ishappening 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 fairlynew to this region and has intensified the collapse of regional markets.Until this is regulated, analysts will face difficulty in understanding thebehaviour of regional equity markets.n Is the glass half empty or half full? Always keep your focus on key factorsthat 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 aspossible 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 talethat should be wiped out from our thoughts.“Was there a different strategy? Actually none. Our strategy during themarket collapse was to reduce equity exposure and invest in themes thatwe believed would perform well even during recession time. We main-tained high exposure to consumer staples and transportation sectors. Wealso made sure to raise the cash cushion in our managed funds. The twofunds 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 lowliquidity of the available issues in the region did not encourage me to doso. In addition, during this crisis, bonds were reacting in the market, to acertain extent, like equities.”Abdul Kadir HussainChief Executive, Mashreq Capital, Dubai“I think people really learnt how interconnected andglobal financial markets truly are. What started out as aspecialised mortgage crises in the US, mushroomed toglobal proportions due to the leverage in and the inter-connectivity of the capital markets.“I think the other lesson learnt was that derivativestructures are not for everyone. There maybe a placefor them in the market, but they are not a basic assetclass like equities, bonds or real estate etc. I think peo-ple had started treating them as such. I think you learntthat when product returns are based on statistical correlations holdingthen 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 marketlosses, but value will eventually return to those investments. This is seenin the fact that most equity and bond markets have now returned to morenormal valuations, yet a lot of the derivative structures that were createdbased 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 impactthe fall of a significant financial institution can have. Conversely, I think alot of investors remained shell shocked and sidelined for a lot of this yeareven though they knew the markets were oversoldand offered excellent value. I think upon hindsight,a lot of people would say that they should have hadmore respect for the coordinated responses of the globalcentral banks and governments and should have gotten backinto the market earlier in the year than they did in order to cap-ture that value, which has largely now gone.”Shakeel SarwarHead of Asset Management, Securities andInvestment Company BSC (SICO), Bahrain“I believe that the last year’s financial crisis wasa type of event that perhaps happens once in acentury. No living investment professional hasseen anything like it before — markets liter-ally remained in a free fall mode for about sixmonths. Many emerging and GCC marketslost between half to one-third of their valuesduring 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 ofan 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 notalways work. One needs to have a clearly definedloss tolerance or some sort of a ‘stop loss’ strat-egy. Statistically, avoiding losses in bad years ismore important than producing excess returnsin good years in order to generate positive andabove average long term returns.“As I told you, it was an unprecedentedcrisis. All asset classes literally collapsed.Whether you were a long-term value in-vestor or a speculator, the results werenot much different. The only strategythat worked during this period wasto cut your losses and go into cash orgold. I did have a stop loss strategywhich helped me to contain my losses.Resultantly, I was down 30 per centfor the year versus between 60-70 percent for the benchmark and most of mycompetitors. However, the fact that myfund lost almost one-third of its value ina year hurts. Had I strictly followed andimplemented the stop loss strategy thatwe have in place, I could have done evenbetter.”Mohammed Ali YasinChief Executive, Shua’a Securities, UAE“The speed of the meltdown took me by surprise. Forthe first time, no one in the world could predict wherethe bottom is, or when we will hit it. It was unique in thesense that everything crashed at the same time, therewas 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 sellingrush and stopped taking phone orders, money transfersthat used to take 24 hours to happen took three weeks! My belief in therobustness of the world financial system was destroyed.“In my personal experience, I benefited from my calmness in assessingthe fast moving circumstances around me, and not follow the panic herd!Based on that, I looked at the macro-factors, past historical economiccrashes in the area, studied the real facts and discarded the rumours andsilly stories going around by people who lacked the knowledge and realunderstanding 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 wereable 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 muchleverage was one of the main reasons for what we saw last year and whatpeople need to know going forward is that borrowing needs to be alwayscontained 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 crisiswe 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 occurand when economic crisis hits the economy. Also, there is nothing in theworld called capital-guaranteed risk, as the guarantor could himself failand go bankrupt, like in the case of Lehman Brothers, where they wereone of the biggest financial institutions providing tools to allow capitalguarantee investments in the world.“From the point of a view of a brokerage company, it must be pointedout that there were lots of companies that were adopting wrong practic-es of trading of clients accounts daily at a high leverage levels, ‘churningof accounts’, which lead to large losses to investors. So those who over-leveraged have really suffered. So one lesson forbrokerage 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 onfor your livelihood and you are not worried to lose.“In answering the question on anything you would have donedifferently, my answer is: ‘It’s too hypothetical, and means nothing.’I am sure most people replied ‘we would have invested much less inreal estate’ and ‘we would have sold all our investments’! Easier said thandone.“I guess the philosophical answer would be, ‘Be less greedy!’”Deon VernooySenior Executive Officer, Emirates Investment Services,Dubai“The financial market crisis of 2008-09 confirmedmany of the lessons embedded in financial market his-tory. Most importantly, investors have a tendency tobecome completely irrational at the extremes and thatit creates opportunities.“Secondly, risk has a price, and thirdly, that liquidityhas substantial value. Many fund managers and ana-lysts may have forgotten these important lessons andthe crude reminder will stand them in good stead inthe future.“It’s very easy to pick holes in any strategy — with hindsight. However,many managers and investors, including ourselves, have certainly takenthe reminders about the price of risk and liquidity on board. Many man-agers and analysts may also spend more time in future on assessing thereal capabilities and governance procedures of external service providersto avoid the Madoff-like pitfalls.”Farhan MahmoodExecutive Vice President, Morgan Stanley, Saudi Arabia“For me, the best thing about being in the financialmarkets is that every day is different. You come to theoffice with a view based on a set of assumptions, butguess what — the markets tend to surprise. So you con-stantly need to keep checking assumptions and fore-casts.“Specifically on Saudi Arabia, although the impacthas been muted, the crisis has shown the high level ofcorrelation this market had to global markets, despiteSaudi 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 andfocus on the fundamentals. I think that has worked well, albeit there weretimes in the interim when my conviction was challenged!“Looking back, I feel that the last quarter of ’08 and first quarter of ’09were the times to increase risk appetite, not reduce it. It was clearly anexceptional situation where fear and panic had gripped the financial mar-kets and there was a crisis of confidence.”Oneyearon:Lessonslearnt