Every trader — be it in forex, equities, commodities, etc — globally knows the maxim “buy the rumour, sell the fact”. It is a phrase often quoted by stock or futures traders that explains price declines occurring after an anticipated positive event has happened.
It is the response or behaviour markets have towards pending developments, rumours or speculation as it relates to them. Investors and traders are always trying to stay ahead of the market and anticipate its direction or movement. Investors begin to price-in the value of the rumour (whether it’s positive or negative) in advance of the actual announcement or confirmation of the rumour… thus “buying the rumour”.
When the actual announcement takes place, many a time prices decline even though the announcement was positive or the rumour was accurate, thus “selling the fact”. Let’s take an example.
Following are two reasons for the recent increase in Dubai’s real estate prices:
Starting 2011 and early 2012, the momentum in real estate values was the Arab Spring effect. And then came the big wave, i.e., Expo 2020. In the last two years, the price increases can be attributed to 40 per cent on account of the Arab Spring and 60 per cent from the Expo.
Is the current price range a sign of irrational exuberance or an indication of market expectations in the near future? Or of prices in 2020? Is the current level of real estate pricing factoring in too much too early. Will Dubai start building everything overnight or will it be more of a gradual build up of the infrastructure and businesses heading into 2020.
Growth would ideally be a gentle sloping upward curve 2014-16, which will get steeper 2016-18, and much steeper after 2018. Yet, the real estate investors are going bananas, and are trying to bring back the behaviour of 2006-08, by raising prices with each passing day.
And the authorities have been concerned not with the increase in prices, but with the pace of increase. We have witnessed the following changes, to apply some speed-breakers:
• Mortgage cap rules (80:20 for UAE nationals, 75:25 for expats).
• 4 per cent fees at Dubai Land Department from 2 per cent.
Where are we headed from here?
• Markets could drop in the short term (buy the rumour, sell the fact…).
All short term investors, would like to book profits, wait and watch the situation and then get back in at a later stage. Correction would be healthy for the market, and that would weed out short term players. And, hopefully, we could have long term investors and end-users buying up the market which will help build the long term uptrend. Anything which is a runaway market has lot of blood shed on the way down.
A few markets which witnessed bloodshed in the recent past:
• Gold falling from $1,900 to $1,200 (Dh6,973 to Dh4,404) (2011-2013);
• Oil dropping from $150-$35 (2008-09); and
• The Japanese yen falling from 77 to 104 against the dollar (2012-13).
We are definitely proud and very positive from having the Expo 2020 in Dubai. We will showcase to the world that we are the best at what we do. But let us be realistic and pragmatic with behaviour in the market place. As they say, investor memories are very short. Investors tend not to learn from mistakes.
Greed supersedes prudence. Upward movements in prices baffle the most conservative investor. At some stage the conservative investor jumps in and joins the bandwagon. He who is left holding the lemon at last, is short changed in the game.
The writer is an independent market analyst.