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Three behavioral biases that equity investors need to watch out for!

Date : 31/03/2020
Author:  Marmore MENA Intelligence

In a perfect world, all investors would take logical decisions with the markets being priced to perfection. However, this is far from the reality as most investors are much less rational than they think when it comes to decision making. Their irrationality does not relate to a lack of ability, but purely reflects the fact that humans tendto be driven by emotions. These emotions govern everyday decision making of individuals, giving rise to certain biases. When these biases come across to the world of investing, they result in inefficiencies that end up costing investors dearly. Especially during crisis situations, when investors are stressed and resort to panic, even the most logical minds fall back to making the basic mistakes which we would otherwise not make. Therefore, at this juncture where
markets have come crashing down, investors need to be wary of some biases that could potentially result in huge financial losses.

1.    Loss aversion

Loss aversion suggests that for individuals the pain of losing is psychologically twice as powerful as the pleasure of gaining.  In simpler terms, the feeling of fear is much more powerful than greed. When investors see their portfolio value falling by the day, they tend to hit the sell button prematurely to avoid further losses and invest when times are better.

Source: Marmore Research, Reuters; Note: MSCI GCC index is used, KD 1,000 is invested on Dec 31, 2006 close.

  Investment value of KD 1,000 if the investor stayed invested;   Investment value if the investor sells during downturn and reinvests when there is a rally

The above example shows that an investor who tends to stay invested ends up with greater returns than that of an investor who panic-sells in the midst of a crisis and invests later. 
Takeaway – Do not panic! Markets tend to have cycles. Stay invested for a long term.

2.    Recency Bias

Recency bias is the tendency of investors to focus on recent events and extrapolate them into the future.In the process, they tend to forget what happened prior to these recent events. Ignoring information that is old and placing too much emphasis on recent information is one of the biggest mistakes that investors make quite often. When a portfolio’s yearly return is negative during a year, they tend to forget its performance in previous years and expect it to fall further in the next year.

In the above example, U.S. markets had a negative return of 38.5% in 2008, but later bounced back. The 10-year CAGR returns between 2005 and 2014 was 5.4% despite the crisis, suggesting that in a longer time horizon, markets tend to recover and give positive returns. If an investor took out their money after the 2008 meltdown, they would have missed out on the rally that followed. Therefore, guessing the market direction based on recent events would not be a sound strategy.

Takeaway – Do not let recent performance affect your investment decisions. Invest systematically for a longer term.

3.    Overconfidence Bias

Overconfidence bias is the tendency to hold a false and misleading assessment of our skills, intellect, or talent. In short, it’s an egotistical belief that we’re better than we actually are. It is a common thought among fund managers that their performance is either average or above average when compared to passive indices as they believe that they have the ability to assess the market better and take decisions instead of following an index blindly. However, the majority of fund managers fail to beat benchmark returns. The case is similar for most individual investors who believe that they have the ability to time a market. The belief that they could predict the trajectory of future events correctly is a fallacy that results in many investors losing their money. In hindsight, it is easy to point to a level and say that it was the market bottom, but it is close to impossible to predict so with great confidence when we are experiencing it. 

Certain investors overestimate their ability and end up making irresponsible investment decisions, which they regret later. Their rational thinking does not hold good at certain times as the ability of markets to stay irrational for longer periods is higher than the ability of investors to stay liquid. Therefore, it is always smart to adopt a wait and watch approach.

In the above example, there are many instances where intermittent rallies have been bought into by investors. In most cases, they have been led to further declines. As investors tend to jump in earlier than necessary based on their beliefs rather than facts, they tend to get trapped, losing their liquidity and being unable to invest at the right moments. 

Takeaway –Do not try to time the market! Each crisis is new and might play out differently. Tread with caution and wait for a sustained recovery before investing rather than trying to catch a falling knife.

Each crisis is a lesson, but it doesn’t necessarily mean that all crises follow the same pattern. Biases are inherent for humans by nature and could be avoided with utmost discipline. Alternatively, these biases could be removed by eliminating the human aspect during decision making. Robot advisory platforms that use Artificial intelligence and complex algorithms could be the way to go in the future to avoid biases.


Tags:  equity, investors

 Current rating: 0 (3 ratings)

Private equity can fill the funding gaps left by banks

Date : 23/06/2016
Author:  Marmore MENA

The article originally appeared in The National.

Is this the perfect time for GCC private equity and venture capital to scale up?

After the global financial crisis, private equity activity in the GCC declined tremendously. Fundraising became anaemic, despite the sizeable amount of dry powder accumulated over the boom years, and deals had stalled as acquisition finance became expensive and difficult to obtain. After a long hibernation, value raised under private equity experienced a quantum leap from US$900 million in 2013 to $2.4bn in 2014, but fell to $500m last year.

The recent entry of UAE and Qatar into the MSCI Emerging Markets index has led to many market reforms across the region aimed at improving disclosures and standardising corporate governance. But nascent legal and regulatory framework, with stringent foreign ownership restrictions, weak bankruptcy laws and high set-up costs, continue to dampen investor enthusiasm.

So what has changed in the recent past? Last year marked one of the worst years for oil prices and revenues – the backbone of most of the GCC economies. And the consensus forecast for the next two years indicates only a modest increase in prices, at less than $60 per barrel, a consider­able fall from the high of $115 per barrel in June 2014.

Such a drastic drop in revenues has triggered a liquidity fall, affecting several sectors of the GCC, especially in banking and financial services industry.

Growth in deposits are lagging behind credit growth and this deficit is accentuated by falling government deposits and continued remittance outflows.

Government borrowing has also been on the rise, which crowds out the private sector and deprives them of credit facilities. S&P has already forecast that Saudi Arabia is expected to tap international debt markets by 2016-17, as the domestic banking system can lend only up to $100bn, which comprises only one-third of their borrowing needs.

In addition, the looming rate hikes from the Fed could increase cost of capital, which makes it more difficult for the private sector to access funds. The IPO market, which in 2014 had 14 new issues worth $9.7bn, including the listing of NCB, the largest IPO in the region, had a dull year last year, with fewer than five new issues.

Most companies are staying away from floating shares in the GCC markets, owing to the oil price volatility and weak global cues. This hurts small and medium-sized enterprises (SMEs) and start-ups, which were already facing stringent collateral requirements, including personal guarantees.

Banks are reserved about funding SMEs because of their limited size and higher risks as SMEs are more vulnerable to eco­nomic fluctuations. Larger corporations in the GCC also rely heavily on bank financing, as it allows them to be less transparent and maintain greater control over their operations. But this leads to crowding out of funds as SMEs compete directly for capital with large corporations. For example, in Kuwait, the percentage of total bank loans given to SMEs is as low as 2 per cent. Fewer options in terms of Sharia-compliant products also imply that many SMEs find themselves excluded from the banking sector.

The number of start-ups have also risen in recent years and require strategic guidance to expand during the early stages. It is in this setting of challenging economic situations coupled with growing number of start-ups that PE & VC funds cannot only provide the required capital but also leverage on their industry contacts to share their domain expertise, streamline operations and thus create value for these businesses.

For example, Saudi Arabia’s STC Ventures provided a $3m venture capital funding for, a Dubai- based finance comparison start-up, which is expanding into Saudi Arabia. STC would also facilitate expansion by getting local support, and access to untapped sectors.

Many major sectors in the GCC are set to grow in the coming years, as rising disposable incomes will inevitably lead to higher consumption of goods and services. Expanding retail businesses, from jewellery, beauty and cosmetics, clothing, supermarkets and restaurants are expected to intensify investor interest, with significant opportunities in online retail (general and discount) space, as mobile penetration continues to rise in the region.

Luxury retailing is already a thriving business in the GCC – propelled by affluent locals, splurging expatriates, growing brand-aware youthful population and deep-pocketed tourists. Rising public spending in education has been driven by the need to develop skills of a rapidly growing population in the GCC countries and offer considerable opportunities for PE players.

Similarly, health care has attracted a lot of investments in the PE space, as the need to tackle the effects of lifestyle issues and newly introduced mandatory insurance are driving industry growth. In the en­ergy sector, GCC states have also started exploring alternative sources of energy including ­solar power, nuclear and natural gas to boost capacity and diversify the energy mix.

Governments are also focused on modernising their transport and infrastructure, in partnership with the private sector. The entry of PEs into the family businesses can help in the greater flow of ideas, realign focus on core assets and competency, and can generate lead to better sustainability.

Private equity funds could fill the existing funding gap and take advantage of the growing regional economy.

Tags:  Capital Markets, equity, GCC, Oil, private

 Current rating: 0 (3 ratings)

UAE Asset Management Industry - An Overview

Date : 22/11/2015
Author:  Marmore MENA

According to Marmore’s UAE Asset Management report, the UAE asset management industry manages USD 1,264.8mn in assets in about 31 funds as of 21st July, 2015. In terms of products, equity funds lead the pack with 69% share, followed by specialized funds at 20%. Remainder of the assets is spread across money market and fixed income funds. Of the total assets, Islamic funds manage USD 435mn (34.4%) in assets and rest is conventional funds. In terms of the number of funds, there are 23 equity funds, 4 money market funds, 3 specialized funds and 1 fixed income fund.

AUM/GDP ratio for the UAE stands at 0.5%, implying lack of mutual fund penetration as an investment option. The UAE asset management market is small in comparison to Saudi Arabia and Kuwait.  The top five asset managers (out of a total of 10) account for 75% of the total assets being managed; Abu Dhabi Commercial Bank PJSC leads the list of large asset management companies with USD 374mn in assets (29% market share), followed by Emirates NBD Asset Management Limited with USD 339mn in assets (26% share) and Abu Dhabi Investment Company with USD 153mn in assets (12% share).

Analyzing total Assets under Management based on country wise geographical focus we find that UAE stands at 6th position with USD 1,264.8 Mn of AUM. Saudi Arabia is the dominant player in the MENA asset management industry.

We look at the various participants in the UAE asset management market. They range from conventional and Islamic funds, Insurance companies, Pension funds and Sovereign wealth funds. 

AUM Break Up

Total AUM can be further subdivided into Conventional Funds amounting to USD 829.8 Mn and Islamic Funds amounting to USD 435 Mn.

Figure 1: UAE Funds Break Up - Conventional and Islamic 

Total AUM can be further subdidvided as Equity (USD 877.9mn), Fixed Income (USD 40.4mn) , Money Market (USD 92.3mn) and Specialized (USD 254mn).

Figure 2: UAE Funds Break up - Asset Type

Pension Funds

UAE lacks a fully developed private and employer managed pensions industry. The UAE’s total retirement benefits are worth approximately USD 3Bn and are managed by two state providers – the General Pensions and Social Security Authority and the Abu Dhabi Retirement Pensions and Benefit Fund.

Abu Dhabi Retirement Pensions and Benefit Fund

Abu Dhabi Retirement Pensions and Benefits Fund (ADRPBF) was founded in 2000 to manage contributions, pensions and end of service benefits for UAE nationals working in or retired from the government, semi- Government and private sectors in the Emirate of Abu Dhabi, and their beneficiaries. The latest available annual report (2013) shows that the fund invests in more than 50 countries.

The General Pensions and Social Security Authority

The principal activity is the administration of pension and social security insurance plans for the benefit of nationals in the government and private sectors. The authority was established in 1999.

Insurance Companies

In terms of insurance penetration, total revenue and insurance density, the UAE is the leading country in the GCC region. In 2014, the UAE insurance industry produced over USD 6.29bn  of insurance revenues. This makes UAE the largest insurance market in the GCC region. The UAE has presence of both large local groups (Oman Insurance, Abu Dhabi National & Salama) and foreign insurers (RSA, AXA, Zurich).

Figure 3: GCC Insurance Penetration in 2014 (Premium as a % of GDP) (Total Business)*


The investment mix of insurance companies since 2010 shows 30% of funds allocated to high risk / high return investment especially shares out of total 60% of the funds allocated in shares and bonds. The recovery of the stock markets, the high returns generated in 2013 by the stock markets in Dubai and the inclusion into the MSCI emerging markets have increased the investor confidence.

Sovereign Wealth Funds

There are 7 Sovereign Wealth Funds (SWFs) operating in the UAE . The oldest and the largest fund by asset size is Abu Dhabi Investment Authority (ADIA). The fund was established in 1976 and has a size of USD 773bn as of July 2015 . The main funding source of the fund is from financial surplus generated through oil exports. ADIA is also the largest sovereign wealth fund in the Middle East. It is wholly owned and subject to supervision by the government of Abu Dhabi. Emirates Investment Authority (EIA) is the first federal sovereign wealth fund for all seven states comprising the UAE.

Foreign Investors

The revised UAE commercial company’s law draft has been approved by the UAE Federal National Council, as announced on 28 May 2013. The status quo in relation to the foreign ownership limit has been maintained. Existing requirement is for the UAE companies to be owned at least 51% by UAE nationals and foreign ownership is restricted up to 49%. Hence, foreign investor’s participation is currently restricted in the UAE companies. However, companies which are established in UAE free zones are permitted to be 100% foreign owned but are subject to certain trading restrictions of which investors should be aware . Companies listed on NASDAQ Dubai have no foreign ownership restrictions.

Retail Participation

UAE  equity market is dominated by retail participants and they account for the bulk of trading activity. While, ultra high net worth individuals (UHNI’s) are a niche group who are predominantly served by private bankers, retail clients are a polarized group who either trade aggresively or shun markets altogether and invest in bank deposits. Analysing the data for the recent past indicate dominance of individual participants in the total value traded. Individual particpation was 57.9% in the total value traded of Dubai Financial Market. Individual participation was 65.5% in the total value traded of Abu Dhabi Securities Exchange (May 2015). The individual participation has declined in both the Dubai and Abu Dhabi stock markets compared to 2012 when it more than 70% in  both Dubai and Abu Dhabi markets.

Published by: Marmore MENA

Tags:  Asset Management, Capital Markets, Equity, Fixed Income, Mutual Funds

 Current rating: 0 (3 ratings)

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