Click images to view larger versions

The road to riches
Understanding your options when it comes to investing can help you invest more wisely
BusinessToday reports

How can I increase my wealth? The question has begged an answer ever since barter gave way to a money economy. While there are no quick-fix solutions or magic potions that guarantee returns, there are a few investment rules that are worth a revisit. Every investor should work on building a diversified and balanced portfolio. The portfolio should be spread across various asset classes and should strike a balance between low, medium and high-risk instruments. “In any investment, there is a logical and emotional part. Investors need to be guided by their logical side to make an informed choice,” says Anees Sultan, division manager, investment banking, NBO. As a rule, low-risk instruments give low returns while high-risk ones have the potential to give higher returns. An investor’s exposure to risk should be limited to the extent that he can bear that loss. Every investment option has a probability of loss and investors need to bear this in mind. If you lose money on a particular investment, be quick to accept that loss. The sooner an investor accepts a loss, the better are his chances of minimising his losses. A good way to avoid greed is to target a return. And once those targets are achieved, book your profits and get out. Always remember the maxim: leave the last ten per cent to the next fool. Have patience – the people who suffer the worst losses are those who over reach. And most often the attempt to make a quick buck leads to losing a lot. And finally, take charge of your money. Whatever asset class one may choose, make an effort to study it and then arrive at a decision. Never let a broker or financial advisor take decision on your behalf. If you have spent years earning your money, you owe it to yourself to spend some time and effort trying to make it. Given this scenario, fundamentals like where, how, and how much to invest are important in any investment decision.

Investor intelligence
Looking at Oman, one finds a majority being unaware about the existing investment options and how to go about managing their money. A few examples are illustrative. Insurance penetration remains at less than two per cent and mutual funds account for less than five per cent of the money invested in the Muscat Securities Market. Investors have almost all their investable funds parked in one asset – real estate or the stockmarket. Gold is nothing more than a piece of jewellery and art is hardly seen as an investment option. We revisit six asset classes in this issue – real estate, stockmarkets, mutual funds, insurance, art and gold to give you a road map for your investments in 2007. We hope that this package will equip you with the knowledge to manage your investments better.

In growth mode
INVESTMENT OPTION 1 Real Estate

When Ali Yousef Mohammed Balushi bought a 600sq mtr plot in Sohar for RO5,000 in 2003, he had no clue that he had laid his hands on a gold mine. Within three years, he has been inunda-ted with proposals offering four-five times his original price. The prevailing market price of the plot is RO28,000. And Balushi is not the only one who has made a killing in Oman’s real estate market. Examples like Balushi can be multiplied ad infinitum. The joke doing the rounds is that one can actually buy a piece of real estate and sell it within a week and make a neat buck. While that might be stretching the point, there is no denying the upswing. Crystal gazing into the year ahead, the million-dollar question is whether real estate will continue to be a good investment option in 2007. Going by the opinion of market watchers, real estate agents and analysts, the answer remains an overwhelming yes. Says Christopher Steel, general manager, Hamptons, “The year 2007 is critical as it marks the beginning of the international market in Oman. Till now there has not been sufficient real estate in Oman (for international buyers) to make it a viable market. This will change in the coming year.”

Take-off stage
This change is being driven by two main factors: First, Royal Decree 12/2006, which allows non-nationals the right to purchase property in tourism-designated areas (See BusinessToday, May 2006). The decree has led to a sudden spurt of interest in the sultanate’s real estate market from GCC and European buyers. This is expected to crystallise into investments in 2007. The anticipation has started impacting prices. For example, at the Muscat Golf and Country Club, villas that were sold for RO208,000 18 months ago are up by over 85 per cent, to RO386,000. And the trend is expected to strengthen in the coming months. Secondly, with projects like The Blue City, Salaam Resort in Yitti and The Wave taking off, the number of properties on the market will increase. The Blue City has planned 35,000 residential units, and the Yitti project another 2,200. The fact that property prices in Oman are anywhere between 30-50 per cent less than that in Dubai or Qatar adds to their attractiveness. Our recommendation: Investing in tourism designated areas represents a good buy, both in terms of capital appreciation and rental returns.

Gaining momentum
High oil prices, accelerating economic growth and heightened industrial activity are giving a fillip to the housing activity in Oman. The trend manifests itself nowhere better than Sohar, where the Sohar Industrial Port, with its attendant need for housing, has led to unprecedented demand for real estate. The price of land has increased by 300 per cent in two years. Rental returns in Sohar too have increased. Says Mustafa Ali Mohammed, chairman, Al-Qandeel Real Estate Services, “In Sohar, rental returns are as high as 15 per cent.” Muscat also had it good. Year-on-year there has been a 20-25 per cent appreciation in rental returns. For example, the rent for a two-bedroom house in CBD, which used to be RO200 a year ago now stands at RO250. The rent for a three-bedroom apartment in Al Khuwayr is up from RO280 to RO350. “After being stagnant for a number of years, rents in Muscat have started moving up in the last one year,” says Sudhakar Reddy, general manager, Al-Habib. And with the trend expected to hold, investing in a property for rental returns remains a good option for 2007. A word of advice for investors looking at property from a rental point of view: Historically, returns on a multi-let block have consistently outstripped returns on villas so it is more prudent to invest in the former. A villa in Shatti al Qurm fetches a return of 6-7 per cent compared to multi-let buildings which earn ten per cent. Says Said al Busaidy, general manager, Eamaar Real Estate, “With Oman developing horizontally, there is no risk of prices (or rents) coming down. Prices will come under pressure only if vertical development (buildings with more than six floors) is allowed.”

Soft factors
Macro economic factors apart, there are extran-eous factors like a stable political environment and the government’s commitment to progress that make real estate an attractive option in the sultanate. A head-to-head comparison with stock shows the superiority of property as an investment option. Says Nabeel Sultan, deputy chairman, Shurooq Investments, “Traditionally, returns on real estate are far more secure than stockmarkets, which can witness huge fluctuations. The leverage on property too is much higher than stocks because it is a tangible asset and psychologically it makes a difference.” And lastly, the demographics of Oman are loaded firmly in favour of real estate. Less than 14 years make up 43 per cent of Oman’s population, while 54 per cent are in the 15-64 age group. Catering to the housing needs of generation next is sure to help real estate outstrip other asset classes in the long run.

The flip side
While real estate remains a safe investment by far, investors need to factorise certain risks and downsides before taking a decision. The boom in the real estate market has led to a sudden increase in the number of real estate agents in the market; a few of them are fly-by-night operators. So it is essential to check on the antecedents of an agent before entering a transaction. An easy way of checking on the agent is to see whether he is registered with the Ministry of Housing, Electricity and Water. While making a transaction, due diligence is advisable. Two things that should be verified are proper registration of the land or property and the identification of the owner. Says Kelshikar, “Compared to other forms of investments like stocks or gold, where prices are listed and published, real estate prices are not available in published forms. The information has to be elicited from informal or secondary sources. As a result, one should be careful about the source that one is getting the information from.” While purchasing a property, buyers need to factorise a three per cent fee that they need to pay to get it registered. According to the law, brokers are entitled to charge five per cent commission while renting out property and three per cent commission on the sale and purchase of a property. The latter figure is negotiable, with the broker’s commission in high value transactions being not more than one per cent. A big demerit of real estate is that it is not an asset that can be liquidated at a short notice. Unlike stocks or mutual funds which can be encashed immediately, a piece of real estate takes longer to sell.

Top draw
As far as good buys go, Steel recommends areas in and around the Blue City, Shinas (near Dubai border) and Salalah (priced at RO25-30 per sq ft). Says Mukhtar Hasan, managing partner, Al Barij International, “Any place that is a great spot for tourism promises good returns. Thus coastal areas like Ras al Hadd and Batinah are areas of interest.” For a person looking at investing in Muscat, some good options are Al Hail, Ma’abela and Seeb. There are properties in these areas, which can be picked up for RO60,000 and above. Is there a winning strategy to be adopted? There is money to be made both by following a short-term strategy, wherein an investor buys and sells in quick succession re-circulating his money. Or a long-term one where one holds on for one or two years. Says Said al Busaidi, operations manager, Beach Hotel, “Real estate has been giving a return of 70-80 per cent on investment every year. Since supply is low and there is a huge demand, a medium to long-term strategy is preferable.” Overall, one can safely invest 30-35 per cent of one’s investable money in real estate. So don’t wait, take the plunge and see your wealth multiply. n

Market play
investment option 2 - StockMarket 

Worldwide, the stockmarket has traditionally given a return which far outstrips that from any other asset category. The Muscat Securities Market (MSM) has not been doing too badly either. A cursory look at the returns underlines its strength as an investment option. The MSM 30 gave a return of 44.5 per cent in 2005, 23.8 per cent in 2004 and 42.4 per cent in 2003. Analysts expect the MSM 30 to close 2006 with a return of 16 per cent. If past record is any indication to go by, there is a probability that the good times on the stockmarkets will continue in 2007. But with over US$11bn worth of market capitalisation, one can’t go by mere sentiment. Informed investors are sure to demand the comfort of facts and figures before putting their money on the table. So let us look at some fundamentals.

Back to the basics
High oil prices have been the main driver of Oman’s economy. The sultanate’s GDP in 2005 grew by 24 per cent, riding on the US$50 per barrel wave. If oil prices continue to hold in 2007, the probability of the economic momentum being maintained remains high. A forecast by Gulf Investment Services (GIS) expects average oil prices in 2007 to be US$45 per barrel. This should spell good news for MSM. Says Nabeel Sultan, deputy chairman, Shurooq Securities, “Technically, the markets are on an upward mode, the trend should continue unless something drastic happens. The economic fundamentals are strong and a lot of investments are taking place in Oman.” Sceptics might argue that despite high oil prices and good growth, the stockmarkets in Saudi Arabia and the UAE are down by 59 and 60 per cent respectively this year. So what guarantees a sustained performance of the markets in Oman? While there are no certainties in any stockmarket, a few factors are indicative of the innate strength of the index. The valuations of the Oman stockmarket are reasonable compared to the other markets in the region, leaving ample scope for growth. The price earnings ratio of Oman is around 11 compared to a 28.8 valuation in Saudi Arabia and a 20.4 in Qatar. Similarly, the MSM 30’s price to book value of 2.2 is far more attractive than a 6.6 in Saudi Arabia and a 3.1 in UAE (mid 2006 figures). Says Mustafa Ahmed Salman, managing director, United Securities, “The government’s decision to privatise certain public sector companies and the IPOs of Galfar, Sohar Bank and Oman Qatar Insurance Company will help the market in a positive fashion.” The entry of these companies will definitely increase liquidity on MSM. The growing momentum on the plans for regional integration of the GCC countries is expected to further strengthen this trend. The Capital Market Authority’s decision to allow foreign brokerages to set up shop in Oman (See BusinessToday February 2006) has generated a lot of interest in Oman’s markets. From a regulatory point of view, MSM is very well-governed with high levels of compliance and transparency. The high standards of corporate governance are sure to comfort GCC investors looking at investing in the sultanate. “With banks getting BASEL II compliant in 2007 as per the guidelines by the Central Bank of Oman, the markets should get a boost,” says Sankar Kailasam, vice president- research, GIS. Analysts expect returns on the MSM to be anywhere between 12-15 per cent in 2007. While the MSM has the momentum going, investors need to keep an eye out for a few factors that can ruin the party.

Getting it right
While there is a potential to multiply one’s wealth on the MSM, the process is not without its pitfalls. But is there a strategy to make a windfall on the stockmarkets. After all, the Warren Buffets and George Soros’ of the world have treaded the same path and ended up with a pile of wealth. While everyone might not be a financial whiz like Buffet or Soros, there are certain rules that help all investors. “Investors need to be ready to make a long-term commitment to see reasonable gains. An investor must define his risk profile, likely tenure of investment, financial needs and his psychological make up before investing in the capital market,” says Manish Mahyavanshi, deputy head of investment management group, Oman Arab Bank. Investors can pick stocks for short-term, long-term or risk-based and even speculative stocks as long as they adhere to a cardinal rule: one’s exposure should be commensurate to the risk that one can absorb. Ideally, one should build a portfolio that is a mix of high risk, moderate risk and savings deposits. Investors can also hedge risk by investing in different markets. Sultan gives a final piece of advice. “Never try to fight the overall trend of the market.” A rising tide raises all ships, so swim with the tide and emerge a winner.

The downside
Stocks by nature are a high-risk asset class. And investors need to factorise these. As oil prices remain the biggest determinant of the health of the economy, investors need to keep an eye on oil prices. If oil prices fall steeply, it could put a spanner in the works, affecting the markets. “It is the benchmark which supersedes all other factors,” says an analyst. With the property market giving a return on investment of over 50 per cent, a lot of money being made in the real estate market is finding its way into the stockmarket. While this is good news and belies the myth of an inverse correlation between the two asset classes, it also increases the risk profile of the market. If the real estate market gets hit due to some reason, the stockmarket is sure to feel the ripple effect. The growing integration within GCC leads to a similar risk as any reversal of fortunes in the UAE or Saudi Arabia can have an adverse impact on the sultanate’s market. Then there is the business risk of companies, which one needs to factorise. With Oman and the US signing a Free Trade Agreement (FTA) and the sultanate becoming a member of the World Trade Organisation (WTO), companies in Oman are now up against the best in the world. While on the one hand FTA and WTO will open up new vistas for the Omani companies, they will also increase the competition level for local firms. “There is definitely a need to look beyond mere numbers. Off the balance sheet items like a company’s management, its strategy and entry barriers in various sectors assume new significance in the current context,” says Sultan. And finally, there is the risk of illiquidity. Says Mukhtar Hasan, managing partner, Al Barij international, “There is always a chance that an investor might not get a buyer at the price at which he wants to sell. So one has to be careful about the illiquidity of one’s stocks. And this is why blue chip stocks prove to be a safer bet than smaller companies.” The lack of market makers – players who step into the market when people are selling a stock in large numbers on the market and balance the market by picking up these stocks – is one of the reasons for the low liquidity in the local market. So factorise the risks and then pick your stocks. Despite such risks, the stockmarket promi-ses good returns. And we strongly recommend that investors park a reasonable amount of their money in stocks. n

Your Life's Worth
investment option 3 - insurance

Only two per cent of Oman’s 2.4mn population has an insurance cover – a sad commentary on how people ignore their life’s biggest risk. So while we wear seat belts while driving and lock our homes while going out, many a time we forget to ensure a safe future for our family if things go wrong. “Insurance is an investment option where the objective is to cover uncertainties beyond one’s control,” says S Venkatachalam, general manager, National Life Insurance. Taking insurance should be a top priority for everyone from the moment one starts earning. And it does not require huge pools of money to get a suitable policy. Says Deepak Kamath, country manager, AXA Insurance, “If one starts early, one needs as little as one per cent of one’s earning to get the requisite insurance cover.” And the policies that one needs to get change at different stages of one’s life.

The essentials
Here are a few covers that we would recommend: The foremost one is life coverage. The policy provides for two eventualities – the risk of dying too early or the risk of living too long. In case of premature death, a life insurance takes care of the financial needs of the bereaved family by paying out the sum assured. The rule of thumb is to have a sum assured, which is three to five times one’s annual salary. The next one is covering one’s assets like car and home. Getting a motor insurance – at least a third party insurance – is a mandatory requirement. But other assets like home is usually left exposed to various risks. This is a bit surprising as a house is usually the single largest asset that most people acquire in their lifetime. And it costs little to insure a house. For example, a three-bedroom flat can be insured against a host of casualties like fire or earthquake for as little as RO25-RO30 per annum. “For just over RO2 a month, one can get a lot of peace of mind”, says A R Srinivasan, assistant general manager, Al Ahlia Insurance. A medical insurance and a retirement policy are two other must haves. Then there are schemes for special needs like an education or marriage that one can plan for.

Risk and returns
While it would be a misnomer to compare returns on an insurance policy to other inv-
estment classes, taking a life coverage with a savings plan gives a return of 2-3 per cent based on the tenure of the plan. Not too bad, when we consider the fact that most banks in Oman give a return of 1-4 per cent on deposits. In an asset insurance like a car or home insurance, there are no returns. There are a few things that a customer needs to be aware of while taking an insurance. One, check on the financial standing of an insurance company, whether it is backed by good reinsurers and its past track record. Then read the policy document carefully, including the footnotes if any, and get a good understanding of the policy. So why is this important? Says Kamath, “There is a range of products available in the market, but not all of them are good. For example, medical policies have a lot of exclusions – like a limited number of hospitals where one can go for treatment.” Oman being a price sensitive market, most insurance companies work out the paying capacity of an average customer and then work backwards on offering commensurate facilities. With more education and awareness this should surely change. n

Good old gold
investment option 4 - gold

It has been a return to form for gold, a replay of the heady days of the early 80s, when prices peaked to reach US$850 per ounce. In the last three years, gold prices have almost doubled, going from around US$350 to US$623 towards November 2006. And it is expected that the metal, both commodity and asset, will see a further zoom in its prices. Structural weaknesses in the dollar, among other factors, are expected to propel prices to around US$800 an ounce by December 2007. One way or the other, political uncertainty makes commodities like gold more attractive. And when in doubt, investors do tend to shift their capital from riskier assets to less volatile ones. Gold has benefited from this in the recent past, and that security is gold’s selling point for potential investors, making it an attractive hedge now more than ever. Explains Kiran Hajrani, manager, Bhaskar Devji Jewellers, Oman, “The fact that gold prices have nearly doubled in the last few years has caught the eye of those interested in short-term gains. Of course, it helps when you buy large quantities. But even for the average individual, it is a good investment option to cash in on a rainy day.”

Gold rush
Admittedly, there are more customers, both Omani and expatriate, who buy gold for the dual purposes of usage and saving as opposed to pure investment. Several jewellers as well as money exchanges stock gold coins and gold bars, the latter available in weights ranging from 1gm to 1kg. But jewellery easily outsells bullion. Says K F Jose, showroom manager, Alukkas Jewellery, “It is a small percentage of our total customers, say around ten per cent, who buy coins and bars. But in general, customers across nationalities trust the value of gold.” In the sultanate, all gold sold is stamped by the Directorate General for Specifications and Measurements, Ministry of Commerce and Industry. The quality and security issue taken care of, the liquidity aspect comes into play. The fact that gold can be traded in for ready cash or exchanged for new ornaments close to prevailing prices adds a generous dollop of acceptance to it. A lot of shops offer the same price on exchange. Meanwhile, they deduct around 300bz per gram and/or making charges, when buying back gold from customers in exchange for cash. Says Rajesh Govindan, area sales manager, Damas, “Suppose gold prices have fallen from the time you bought, we are obviously not talking about a 100 per cent return on investment. But you will get something back.” Traditionally, that has been gold’s strength. You may not always make money by holding it, but you will not lose either.

Currency of choice
Investors worldwide have been getting a lot more than a mere something back because gold prices have not really fallen. Gold has been lis-ted at the New York Stock Exchange through the World Gold Council (WGC) initiated Exchange Trade Funds (ETF) since 2004. According to WGC, in 2006, 109 tonnes flowed into ETF and related products, making for the largest quarte-rly increase from the time the gold shares were first listed. This year, the total demand for gold, at 835 tonnes, was about 16 per cent lower than in the first quarter of 2005. But this equalled a nine per cent increase in spending on gold in dollar terms. In simple terms, buyers are spen-ding more on gold than they did a year ago.

Gold is an effective portfolio diversifier. Homogeneous and indestructible, it provides a sense of safety that is hard to match. Says Hajrani, “Paper currency could become zero due to instability. But gold will always have value.” Govindan talks about how gold retains that value even after use, particularly for women investors and customers. “When you think about it, what would you rather spend a large sum of money on? Clothes, perfumes and cosmetics that don’t last, or gold that does?”

Portfolio place
If you are interested in gold as an investment, what proportion of your portfolio should it occupy? Ideally, this should be based on detailed financial planning, keeping in mind individual lifestyle and risk appetite. But it is widely believed that 15-20 per cent of gold as part of the investment kitty is a sound idea. Says Hajrani, “While gold is a good investment, it is still not advisable to put all your money in it. After all, prices do fluctuate.”

So should you go for gold? There are really a lot more reasons to invest in it than there are to avoid investing in it. We will come back to what we said in the beginning about gold being an effective hedge. Gold has been keeping pace with inflation for over 200 years now. That alone puts it in a league of its own when it comes to investments. Whenever and wherever you are buying, make sure that the gold is stamped, or accompanied by quality certification documents. These are essential to recover your investment, particularly when you are going back to reliable dealers. And if you have already understood and appreciated gold’s value, you probably don’t need more proof that this instrument is an investment for all time. n

Art Start
investment option 5 - art

$140mn is as good a figure as any to catch an investor’s eye. That was the amount for which American artist Jackson Pollock’s painting ‘No. 5, 1948’ was sold for in November 2006 by a collector, in the process making for the most expensive art deal in history. Of course, not every artist is Pollock, and not every painting sells for that amazing figure. It must be understood that art doesn’t really have intrinsic measurable value. Basically, it is worth what someone is willing to pay for it. Investing in art can often be speculative investment, but it is investment nevertheless. And while the art scene in the sultanate hasn’t reached levels to make paintings a visible and viable source of investment, this might actually be an opportunity in disguise. Speculative investment is, after all, about spotting winners before others do. Somewhere out there is the next multimillion-dollar painting. And knowing your art is the first step to finding it.

Brush with impressions
Currently, it is a difficult proposition to put figures on how art created in Oman has appreciated in value because there is no measuring standard or governing organisation to go by. Enaam al Lawati, fine arts coordinator at the Omani Society for Fine Arts, informs that the works of certain Omani artists have apprecia-ted from approximately RO200 to around RO1,000 in a ten-year period from 1996 to 2006. But there is no information on re-sales to pin down exactly what kind of return on inv- estment a buyer may get. Lawati is blunt about the prevailing attitude towards art, and as a derivative, investment in it. “Most people would rather spend RO200 on a sofa than buy a painting for the same amount. There needs to be more awareness among people about the potential that art has.” There is also a lack of a commissioning culture. Lawati says that apart from the ministries and a few large corporates, there’s no one really doing this. Sarah White, arts advisor and manager, Bait al Zubair Foundation, believes that awareness about art is growing, as is the arts scene in general. “But like so many other things in this region, it is relatively new in the global arena and it is competing with countries that have had a strong history of art scholarship and arts patronage. Art is in its infancy but artists are pushing forward and producing challenging work of an internatio-nal standard.” She adds that people tend to buy work that relates to Oman (natural views and traditional images of forts and daggers, among others), and that prices range from RO50-5,000. Comparatively, the market for abstracts is limited, says Karen Macfarlane, manager, Al Madina Art Gallery. She believes that the development of art as an investment will take time, but that it is sure to happen. “Tastes develop with time. A greater interaction between various art galleries and the Omani Society for Fine Arts could be the first step in this direction.”

Getting arty with it
Meanwhile, awareness has increased enough in the region for international auction house Christie’s to have held its first sale in the Middle East in May, 2006. The event collected US$8.5mn from art patrons around the world. For those with the resources to invest in art, the world is a varied and colourful market. Keeping up with trends in the market, tracking critics and hobnobbing with gallery owners are all necessary steps to getting investments in the art world right. When you are interested in a painting, check how long the artist has been painting, how many exhibitions he/she has had in the past and how well their work has been selling. If an artist has won awards, that tends to add to their future work. Of course, if you buy the work of a reputed artist, it gets more valuable with time. But a new artist with potential could get you a greater return on your investment. Like in any other investment, it helps to do your homework, as also to know the price at which to buy and sell. And in this particular investment avenue, it helps if you enjoy what you have bought. There aren’t any fixed holding periods in the art market, so it makes sense to buy a painting you would like to have on your wall. Though White believes that the business of art is like any other, and that trends and names come and go, she adds, “I think art must be judged as much more than a financial investment – it expands our horizons, it reflects society and history and it is ever evolving.” Lawati’s advice is simple: Read up on art, learn about artists and visit exhibitions. “Entry to exhibitions is free. And you don’t have to buy something once you come here. You can just come and have a look.” It’s definitely worth having a look. Who knows, you might just find an investment that will someday get you US$140mn.