If you are into stocks, follow the big money

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Higher energy prices, Japan supply chain disruptions and fear of continuous depreciation of the U.S. dollar were supposed to scare investors off tacking risks with stocks, but it hasn’t exactly turned out that way. Reporting quarterly results, most of the regional banks outdid the estimates.

Before one can understand which stocks are likely to advance the most in the upcoming economic cycle, one needs to understand who the big buyers are. People running money at the large investment funds, who drive the markets today are survivors of a previous decade. Most of them have watched colleagues, who made mistakes and who are left out now to bid for any kind of jobs.

Today’s fund managers aren’t going to risk their careers on companies with big names, but erratic results. And they do not have time to seek out new ideas or try a small position in unknowns. They are so far behind in their bogeys after 10 years in the wilderness, they will most likely stick with proven solid winners that won’t embarrass or disappoint them.

The economy is fitfully gaining traction, credit markets are open enough for companies to borrow for responsible projects and real estate is plagued with overcapacity.

Accordingly, the door is wide open for expansion of the price/earnings multiple of the entire regional market over the next few years.

That should combine with improved corporate earnings growth to provide annual returns for equities for the coming years.

Equities will be the main game in town, with GCC GDP growth expected to reach somewhere near 7%. And not just any equities, but the high growth attention getters, that always seem too expensive, or otherwise called bluechips.

With the battered institutional investors only slightly increasing their equity exposures and reluctant retail investors returning slowly to stocks, the more aggressive hedge funds are expected to set the direction, speed and tenor of the market, according to analysts.

A good strategy for funds will be to gravitate to investments that can demonstrate consistent, organic revenue growth well in excess of their competitors. Investors are very much likely to favor sectors, industries, and companies demonstrating the most rapid organic growth. They will become the new regional market leaders.

So what does this mean on a more practical level? The fastest growing medium-sized companies are going to continue to be the leaders that they have been over the past 16 months. Take for example Aramex.

Organic growth is the key. Most of the investors will confidently pay up for reliable fast growing shares, and shun everything else. By the end of the  economic cycle we will have one small group of very expensive stocks and one large group of cheap stocks.

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