To exit or not, that’s the question

Experts provide advice on whether to take profits on stocks that have seen huge appreciation in their share prices

Published: 12:15 April 12, 2014

By Gaurav Ghose, Financial Features Editor

Dubai: What an exhilarating ride it has been in the past year for investors in the UAE.

Some of Dubai’s and Abu Dhabi’s stocks have surged to such levels that many of you have doubled, if not tripled in some cases, your investment in the last 12-month period.

Let’s take a few examples. Deyaar Development, a Dubai-based property developer benefiting from a strong recovery in the real estate sector — delivering previous projects and announcing new ones — has soared 345.4 per cent. This essentially means that if you had invested Dh10,000 in Deyaar a year ago, by now you would have made a profit of Dh34,500. That’s a spectacular return by any standard.

The share price of Dubai Investments has galloped during the same period to reach Dh4.04, a 263.9 per cent jump from a year ago. In Abu Dhabi, the likes of Waha Capital, Arkan Buildings and Aldar Properties have gained 338.4 per cent, 325.8 per cent and 188.7 per cent respectively. And if you had invested in Arabtec even only at the start of this year, you would have had by now a return of 1143.9 per cent in little over three months.

Of course some of the blue-chip stocks, considered to be more fundamentally sound in the long term and among the favourites of fund houses and investment banks, haven’t had such huge gains. That’s because they have become expensive, that is their valuations have become stretched over a period of time and thereby unattractive for the time being. Hence, they are relatively traded less compared to some of the speculative stocks that have been subject to higher volumes.

Decline

While some of these big names still registered quite decent rises, others, especially in 2014 so far, have disappointed. Thus, Emaar Properties and Abu Dhabi Commercial Bank have advanced a solid 96.3 per cent (even though it was stuck in a price channel between Dh8 and 9 for considerable amount of time this year and now it’s moving up again) and 89.5 per cent in the last year, whereas National Bank of Abu Dhabi is up only 34.2 per cent over the same period (and in fact up only 7.9 per cent year to date). This year, First Gulf Bank shares have declined 5.85 per cent, up only 18 per cent on a 12-month view.

At the end of the day, most of those riding these trends have made pretty good profits. In a market such as the UAE — which has witnessed one of the biggest gains in the world last year (Dubai up 107 per cent and Abu Dhabi close to 70 per cent), and is on an uptrend that is likely to continue for some more time — it is difficult to detach yourself from the holdings. It may well be that you just don’t want to exit the market, or reduce your allocation, even when some of the fundamentals of some stocks may have changed (like higher valuation), or the market is seeing higher volatility. The temptation is to hope to keep accumulating gains.

However, experts suggest that you should have a plan to take some profits incrementally even in a surging market and re-enter the markets when there are occasional dips, and/or take the cash and diversify your investments across geography and sectors and even various asset classes. Essentially, it amounts to hedging or spreading your risk.

Exiting the market

So, how does one decide when to exit in a market that has seen several stocks’ prices go through the roof? The right answer depends on two factors.

According to Talal Touqan, head of equity research at Abu Dhabi-based Al Ramz Securities, the first one is to ask: how does the stock look from valuation and economic perspectives?

Second, what are the trader’s return objective, risk tolerance, and time horizon?

“The answers to these two questions combined can lead to a somewhat rational decision,” he said.

Tareq Qaqish, head of asset management at Dubai investment bank Al Mal Capital, agreed.

He said that if the valuation is stretched, which is the case in some stocks in the UAE, investors should be looking at either profit-taking or reducing their allocation to those stocks.

In fact he cautioned against speculation in terms of taking leverage or margins.

“People who have made 100 per cent [profit] can still make 200 per cent or more and [yet] can go back to a loss,” said Touqan. “It all depends on why the stock sky-rocketed, the nature of trade, as well as the means of buying—whether cash or taking margins.”

But in the context of selling your position, Sadi Hassouneh, the chief executive of Mahal Thqa Financial Advisors and chief operating officer of Mondial Dubai, reminds that Warren Buffett’s three biggest mistakes of the great investor’s life were “selling Coca Cola, selling Coca Cola, selling Coca Cola.”

“The point being made by Buffett is that timing the market is impossible…therefore doing nothing on a stock — as long as you believe the stock is not seriously over-valued — is better than trying to buy in and out of the market,” said Hassouneh.

Momentum

Another element an investor should be looking at is the momentum of the market.

“What’s happening now in the UAE market is purely driven by momentum trading,” said

Qaqish. “This momentum could last for a while, and there is no real [basis for] timing to exit the market at this stage because the market continues to go up.”

It’s true that often the greatest gains occur late in a rally, when exuberance does verge on the irrational. But, of course, the risk of imminent turnaround then is rising as well.

For those trying to tackle sharp, sudden movements, there might be a preference to focus on technical analysis, i.e. the patterns created by stock market charts themselves.

“We study weekly and monthly movements, and take note when momentum slows down on both time-frames,” said Firas Al Zghaibi, financial markets strategist at Abu Dhabi-based brokerage, Menacorp. “This is a clear bull market [right now], and the uptrend is still intact, so adopting a methodology that focuses on trend-following will be very useful.”

Giving support to the momentum theory (effectively buying high, but selling higher) — in the context of the UAE’s robust economic growth and performance of companies, and with the MSCI upgrade and feel good factor of Expo 2020 thrown in the mix, Hassouneh said, “you should be questioning the wisdom of somebody who has made money suddenly ‘giving up’ in the midst of the momentum…what are they going to do with their gains?”

Those investors wanting to hold on to their holdings where share prices have increased more than 50 per cent in the past year, Touqan says that one should see if the underlying businesses are flourishing enough to justify the continued investment.

Global outlook

Some broader issues should also be kept in mind going forward.

“Globally speaking, what concerns us at this stage is the level of inflation and the likelihood that interest rates might pick up 12 to 24 months from now,” he said. “When yields on other alternatives increase, equities start to look less attractive. Regionally, geopolitics and diplomatic stances remain of prime concern.”

However, in the UAE, these factors are still far from posing major threats, he said.

“Credit Default Swaps (CDSs)are actually hitting new lows, and [bond] yields are dropping. Inflation is something to watch out for, though. The spreads of earning [equity] yields versus debt instruments, and corporate growth prospects, still give clear evidence that some, but not all, UAE-listed equities are still attractive.”

In short, not all the stocks will continue to rise, he added. Some will actually fall sharply, while others will resume their climb.

“The exceptional rally has sent many stocks into an overheating area,” Touqan said. “Value investing and high yields are no longer like they were in 2011, but growth stories still exist, tough to spot as they are. It might not be an easy year like 2013, so we can only be cautiously hopeful.”

Hassouneh said the key piece of skill in this regard will be stock selection.

Diversification

After taking profits, investors should relook at their portfolio and seek diversification. This does not mean just within the UAE.

“[It] should be among uncorrelated assets,” said Qaqish. “Asset classes could include bonds, gold, commodities, cash, and real estate — and the diversification should be in terms of geography and in terms of sectors.”

And for investors who are in the market now and still want to speculate, Qaqish advises that they should at least divide their holdings 70-80 per cent in long-term investments — that is in good quality names with strong growth prospects — while the remaining they can still put into speculative stocks, he indicated.

Knowing your own risk appetite as an investor is the other key criterion at this stage, and indeed at any time.

“It depends on each client’s individual objective,” he said. “If you are invested for the long term, you are going to make money eventually.”

Touqan added: “The distinction between which to buy, hold, or sell, should strictly depend on correlations, desired diversification, and expected returns.”

Al Zghaibi of Menacorp said that they advise people “who have made 100 per cent to sell at least half of their positions and hold the rest, because there might be more upside potential on the indices which could amount to between 20 and 30 per cent in the coming six months.”

Maximising gains is a matter of timing, but making sure gains already made are preserved means taking a bit of profit in the meantime. It’s your own choice where you strike that balance.

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