The United Arab Emirates has been something of an investment hotspot in years gone by with particular attention on the Dubai property market. However, despite initially bucking the market trend after the 2008 financial crisis it very quickly succumbed to the worldwide economic downturn with damaging consequences. We thought it would be interesting to take a look at how expats in the United Arab Emirates look at the investment markets and indeed which particular investment classes are catching their attention.
We are starting to see patterns emerge between individual countries and so the findings are interesting to say the least. Barclays International recently looked at how investment trends change, and they found that investors in the UAE were especially keen on “treasure” investments (art, fine wines, classic cars etc.).
The United Arab Emirates
As we touched on above, the United Arab Emirates and in particular Dubai attracted massive overseas interest at the turn-of-the-century with billions upon billions of dollars invested in the property market and indeed the economy as a whole. The area seemed to be going from strength to strength although the main components of the property bubble, the Dubai market, dramatically burst in 2009 and many investors ran for the hills. So while a number of investors have left the area and the financial headlines have been less than encouraging since, then it is worth noting that the investment bubble in the UAE has not burst completely.
There is still interest in the area and indeed it seems as though the various authorities in the region have learned their lesson having pumped enormous amounts of money into the economy with little or no return in the short term. There will be some investors who are damaged because of the situation in Dubai and the UAE in general but on the whole those calling the death of the UAE investment market may well have acted with obscene haste.
Property market (50%)
It may come as a surprise to some people to learn that the property market, the focal point of both the economic rise and economic fall in the region, is still by far and away the most popular investment sector in the UAE. It is very easy to associate the UAE directly with the Dubai market but in reality we need to take into account the other emirates which neither increased as much as the Dubai property market nor fell as far during the dramatic collapse.
Those who have travelled to the UAE, and specifically Dubai, will be well aware that there are still many unfinished property developments and investment is required by many companies in the region. There are some interesting opportunities for those looking to take a longer-term view on investment in the region although there is also an argument that the worldwide economy could drag local economies yet further downwards thereby offering better value opportunities further down the line.
At some point it seems that investors are looking to put cold hard cash back into the UAE property sector although whether the 50% share of the vote represents an immediate investment intention is open to debate.
Precious metals (17.57%)
The precious metals market is often seen as something of a “safe haven” amongst experienced investors and seems to attract more than its fair share of investment during difficult times for worldwide stock markets. This has very much been the case over the last few years and even the merest of glimpses at the price of gold from 2000, standing at $300 an ounce, up to today, standing over $1600 an ounce, perfectly reflects investor trends. Indeed the price of gold hit $1800 in 2011 at the height of the economic crisis sweeping the world. However, it is also worth noting that gold is not the only precious metal to have pushed ahead during these difficult times with an array of other precious metals attracting the attention of investors.
Quite why precious metals are seen as something of a safe haven during difficult times is a matter which has been debated time and time again in the past. It is perhaps the rarity value of these elements and the fact that they are seen as “relatively safe” which seems to turn the heads of many professional and private investors. Whether or not we will see a mass exodus from the precious metals market as and when worldwide economies and worldwide stock markets begin to recover, time will tell.
Stocks and shares (10.81%)
Stock markets around the world have been volatile since the 2008 credit crunch brought on by the American mortgage market crash. Time and time again we have seen false hopes regarding the worldwide economy and indeed the United Arab Emirates is a region which has suffered dramatic rises and dramatic falls in economic terms. It is an area of the world which requires significant overseas investment and until we see the worldwide economy consolidating and then hopefully moving ahead it is difficult to see where significant overseas investment will come from.
With regards to worldwide stock markets it is interesting to see that the index peaked at around 500 in late 2008 and then fell to around 200 in 2009. It currently stands at around 364which is a significant recovery from its 2009 low but still some way off the pre-credit crunch high. There is a common belief within the investment arena that worldwide stock markets tend to look around nine months into the future and whilst we have seen a small recovery over the last few weeks there is still a lack of confidence going forward. Stock markets will no doubt return as a favourite investment tool in the months and years ahead but at this moment in time many investors are still licking their wounds having been sucked into markets which were unsustainably high.
Classic cars (6.76%)
The classic cars market has made a major comeback during these difficult economic times with enthusiasts willing to pay in the millions of dollars for some of the world’s rarest cars. It is interesting to see that the classic car market is number four in the list of investment sectors amongst expats in the United Arab Emirates but it is also worth remembering that this is a very specialist arena and one which requires significant research. Indeed there is every chance that an investment in a classic car will be “dead money” for some considerable time until other investors step forward willing to pay “silly money”.
Unless you have specific knowledge of the classic cars market or indeed have access to professional advice it is perhaps one to avoid for the private investor. The headlines in the newspapers regarding the sale of classic cars may be attractive and demonstrate investment opportunities but you need to remember these are probably experts taking advantage of current demand and current market conditions.
Each week we seem to hear record amounts being paid for artwork around the world and many people will be surprised to learn that the market itself is estimated to be worth US$110 billion worldwide. It is also believed that 30% of investment funding is currently coming from Chinese investors which is a slight concern because if Chinese investors were to pull back in the future then the support for current valuation levels may come under pressure. However, at this moment in time it seems that many investors in Asia are more than happy to pay the price for well-known artwork.
Even though much of the media interest is in the million dollar art sales there is still an opportunity to pick up relatively cheap artwork from relatively unknown artists with a view to benefiting as and when they become more main stream. There are obvious risks in this particular style of investment but if you take professional advice then there is the opportunity to give yourself a chance of making an attractive return.
Fine wine (5.41%)
The fine wine market has been developing for many years now and, according to the survey conducted by Barclays International, investors around the world are now more than willing to pay top prices for top-quality wines. When we talk about investors from Asia, Russia, South America and India investing in the fine wines market it will come as no surprise to learn that interest continues to grow even during these difficult economic times. It is very much the rarity value of certain fine wines which dictates their relatively high prices as well as demand amongst investors.
Many countries around the world were caught short when demand for fine wines began to grow some years ago and indeed the investment arena is now more regulated than ever. However, it is not simply a case of picking fine wines at random to create an investment return and you should take professional advice if looking to go into this particular area. Trends and fashions change very quickly in the fine wines market, as they do in many other investment arenas, so you really do need to keep your finger on the pulse. What percentage of your investment portfolio should be placed in the fine wines arena, assuming you are looking to diversify, is another subject you should discuss with your financial adviser.
The antiques investment arena is one which is perhaps better known than art, fine wine and classic cars but it is one which seems to be relatively low down the list of investment opportunities for expats in the United Arab Emirates and in many other places around the world. Historically the antiques market has gained in popularity when stock markets around the world are struggling which does have the potential to push prices artificially high in the short term.
There are many different subsectors of the antiques investment market and indeed while many of these are specialist some of them are more general. However, the more popular antiques which sell for significant amounts of money are predominantly valued upon their rarity value and the fact that they are irreplaceable. We have antiques from hundreds of years ago which change hands on a regular basis for millions if not tens of millions of dollars but we also have smaller antiques selling for significantly less.
The antiques market is another specialist investment arena and is one which you should again take professional advice about if looking to enter.
Risk reward ratio
Very often we will hear investors talking about the risk reward ratio but what exactly is this? The risk reward ratio is the potential return on an investment compared to the potential risk of losing money. In traditional times the risk reward ratio would be significantly lower than it is today because investors are looking for high returns because of the perceived higher risk of default by third parties such as banks, investors, etc.
A perfect example of the risk reward ratio in real life is the money markets around the world which dictate the cost of borrowing for banks, consumers and businesses. In the aftermath of the 2008 mortgage collapse in the United States of America we saw a number of banks teetering on the brink of collapse and many investors in the money markets were acutely aware of this. As a consequence the required return on funds rose significantly because of the perceived risk of default by third parties and as a consequence many institutions were effectively locked out of the money markets.
We have all seen the news in recent weeks regarding for example the cost of debt to the Spanish government which rocketed towards the 7% level only to fall back to just over 6% after an agreement was reached between European partners to assist troubled economies. There were, and still are in some circles, concerns that the Spanish government is on the verge of going bankrupt and will indeed need yet more funding from the European Union in due course. The very fact that interest rates on Spanish sovereign debt increased to around 7% perfectly reflects the concern that investors have in the short to medium term.
When looking at any investment, whether this is antiques, stocks and shares or money market transactions you need to be acutely aware of the risk reward ratio. There is no point in taking undue risk for a relatively small reward although if you can reduce the risk and increase the potential reward you have the makings of a potentially lucrative transaction.
Historically the United States of America has dominated the worldwide economy although over the last few weeks we have seen the European debt debacle taking centre stage. There is no doubt that European Union members need to pull together to create some kind of bailout package for troubled European economies because this is having a major impact upon the worldwide economy. The concern is that if European economies continue to weaken and their banking sectors come under more pressure then we could see the emergence of “credit crunch part two” which could bring the worldwide economy to a shuddering halt.
China and the United States of America have a major role to play going forward with regards to economic recovery and indeed it is inconceivable that they will not at some stage become involved in various European bailout packages. The reality is that non-European countries have a vested interest in protecting the European economy as a whole because of the impact this could have on worldwide trade and worldwide financial systems. In many ways it is the tail which is now wagging the dog after Europe was seen by many as a poor cousin of the United States of America for many years.
Opinions are strictly divided regarding the potential recovery of the European Union and whether indeed the euro will survive in the longer term. Hopefully, once the European debt debacle has been resolved, the worldwide economy will consolidate and then finally begin to move forward again. When this will happen is anybody’s guess!
Those who have read all of the negative comment regarding the property market in United Arab Emirates, and in particular Dubai, may be surprised to learn that the sector is still the most favoured by UAE expats. Precious metals and stocks and shares are also very prominent in the online poll with other specialist areas such as the art market, fine wines and classic cars, not to mention antiques, also mentioned in passing.
It seems as though interest in the more obscure investment markets has increased dramatically in light of the worldwide stock market fall although whether this interest will continue once the worldwide economy recovers and worldwide stock markets start to move ahead remains to be seen. Interestingly it does show that there is still potential to make money in investment markets, whatever investment market this may be, during some of the most difficult economic times we have seen for centuries.
In the future it would be interesting to run this particular poll again to see whether opinions have changed or whether indeed more obscure investment markets remain in vogue. However, at this moment in time many experts believe that investors will return to the property market and the stocks and shares market en masse as and when confidence returns and the worldwide economy shows signs of stabilising. But who really knows what damage has been done to investor confidence in the longer term?