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NBAD Insights Podcast 02 - December 2017

MENA  Equities – Positive sentiment after OPEC deal

Mohammed Ali Yasin, Head of NBAD Securities explains why stock markets in the region are benefitting from a positive sentiment as a result of the recent historic OPEC deal, fresh liquidity, and the aftermath of the US election. In the Back to Basics segment of the podcast, Alain Marckus explains everything about equities based in the context of the Middle East.

This episode is hosted by Michael Miller (NBAD's Head of Investor, Media & Public Relation) and Nathalie Gillet (Editor)

   

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Read the written version of the podcast's segment 2:

Back to Basics - Bonds

(Interview with Alain Marckus)

NBAD Insights: NBAD Insights: What exactly is an equity?
Alain Marckus, Director of Investment Strategy at NBAD:
Equities is the technical term used for ‘shares’. Owners of shares are investors in a business that is listed on a public exchange. They are called shares because you have a percentage share in that business depending on how much you invested in the company. The more you invest, the greater the percentage holding you have in that business.
The public listing of shares is usually done via a stock market in the country where the business is based.
But sometimes the business may wish to list overseas in order to gain a wider investing audience. This can be the case particularly with larger multinational companies who have a global foot print.

Why do companies choose to go public and issue equities on a stock market?
There are a variety of reasons. It can be because the company has a very unique product or idea that needs scale and requires further capital investment than just lending from its bankers. Technology companies are a good example of this.
The act of issuing shares for the very first time on a stock exchange is called an ‘Initial Public Offering’ (or IPO).
By purchasing and then holding equities, investors, both institutional and individual like you and me, become ‘share…holders’, or in other words, the new business owners. In exchange for the capital invested into the business via those equities, shareholders get a stake in that business.

How can I assess the value of the shares I hold?
Depending on the business strategy of the company, on market conditions, and various factors, the fortunes of the company will rise or fall over time. As a result, your investment in the business will also go up or down. Supply and demand for the company’s shares can also determine the value of that shore on the market, the value of your investment as a shareholder. Every year if sufficient profits are generated, companies reinvest some of it back into the business in order to strengthens the firms balance sheet in the long run and consequently the price of the shares.
But shareholder may also get those profits paid back in the form of a ‘company dividend’. So in addition to the value of the share itself when you resell it, your income as a shareholder also comes from the annual dividends.

When and how is this dividend being paid?
Very often, the rate of the dividend is simultaneously declared when the company reports its full year results. This annual declared dividend amount is then split into two amounts.
- There is the ‘Interim dividend’, which is usually paid after the first half;
- And the ‘Full year’ payment (usually a higher amount to reflect the accumulated total distribution), which is made shortly after the company’s full year accounts are published.
In some cases, such as the United States, the distribution may be more frequent (quarterly or monthly).
Dividends are paid to holders of equities at the declaration date only. On the record date (generally a few days after), the dividend is paid in full to whoever is the holders of the stock on that day. This differs from bonds where interest is paid to the holder the amount of which is dependent on how long you held the bond for during the year.

How risky are equities compared with other asset class investments?
Equities are by no means risk free. It first depends on the business itself and the company’s health. Start-up companies for instance, generally referred to as ‘growth stocks’, or companies with high levels of debt on the balance sheet, may not pay any dividends for some time until the business starts to establish itself and generates sufficient cash flow. Some of these companies have high ambitions that come attached with a greater degree of risk. Investors in these types of companies are generally not looking for a good dividend payout but expecting a sharp rise in the company’s share price over time.
Within equity investing there are varying degrees of risk. The safest form of equity investing will be in preference shares. As opposed to ordinary shareholders, preference shareholders receive fixed dividends, rather like bond investors. And if no dividends are being paid, shareholders are entitled to accumulate them to be paid in full at a later date. We talk about cumulative preference shares. Preference shareholders usually don’t carry voting rights and are sometimes called preferred stock.
In the event of bankruptcy, an equity investor overall, or shareholder, will rank behind a bond investor, loan investor or direct creditor. In many cases of bankruptcy ordinary equity holders have lost their investment in its entirety.

Who invests in equities? Where do I go to invest?
The great thing about stock market investing is that it is literally open to all types of investors - professional, institutional and retail. Bond investments on the contrary have minimum sizes. But the man in the street, who just has a few hundred dirhams, can invest directly in companies through brokers and not just banks.
Many of the larger players, on the other hand, such as the asset managers or pension funds, seek to gain steady returns. They will do this through large investments across a number of asset classes including bonds, funds, currencies as well as equities. In most portfolio allocations the equities component can make up a large percentage of the portfolio somewhere in the order of 30-40% depending on the risk profile of the client.
For the individual retail investor it always makes sense to have risk spread over a number of stocks and shares, mitigating the impact of volatility and concentration in just one or very few holdings.

Alain Marckus, Director - Investment Strategy - Global Asset Management

Disclaimer:
This podcast was recorded on 05 December 2016. All the price references and market forecast correspond to the date of recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in this podcast is not to be considered as an offer or recommendation to buy or sell any financial instrument or banking services. The views expressed in this podcast have been presented without regard to the individual financial circumstances and objectives of persons who receive it. Neither the National Bank of Abu Dhabi PJSC (“NBAD”) nor any of its subsidiaries or affiliates (including NBAD Securities (“NBADS”)) nor any of their representatives makes any representation or warranty, as to the accuracy or completeness of the information contained in this podcast.
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