Exit Equities for Cash, Bonds or Gold?


". . .investors cashing out of equities might be well advised to follow this new trend"

The UAE Central Bank is supplying fresh liquidity to its banking system today to meet the expected rush of holders of local equities, bonds and cash by investors worried about Dubai World's debt moratorium. This will be their first opportunity to sell their stocks and bonds, as the long Eid holiday began last week.

Cashing Out
Those exiting equities and bonds will receive UAE dirhams in exchange. This currency is dollar pegged but already pays 3.5-4% on deposit accounts, way above anything available on US dollars.

If last autumn's financial crisis is a guide, then the UAE banks may well raise rates higher. Depositors got 6% then to encourage them not to cash out into US dollars. Backed by 10% of the world's oil reserves, the UAE is arguably the richest nation on earth.

Investors wanting to stay in liquid assets can choose between US bonds or Dubai government-related debt, which is bound to be squeezed just as hard as local equities today in an across the board sell-off.

Bond Options
The question then is whether you want to hold either US or local government bonds. Bond markets, like any other capital market, can fall as well as rise.

It is more complex for UAE investors. If the global financial markets also correct, then the position is far more difficult to judge than if the problem remains UAE-isolated.

Big Sell-Off
A strong correction in financial markets would therefore seem unavoidable as the liquidity shock of the stimulus shots wears off. Last Friday the global markets showed a microcosm of what to expect in a big sell-off.

The dollar rallied, bonds rose sharply and oil and gold sold off. But in only a matter of hours, a sharp fall in the gold price attracted new buyers and almost restored the price. It seems equity sellers took their dollars and immediately bought gold.

In that case, investors cashing out of equities might be well advised to follow this new trend.

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