Monthly Archives: June 2012

Market Comment 25 June 2012

Late again, sorry!

The world is moving fast, but markets appear to have slowed moderately: the S&P 500 lost 0.6% last week, whilst the Eurostoxx 50 gained 0.3% and Russia lost 4.0% (having rallied aggressively for the previous two weeks).

In fact, Russia’s performance was impressive, considering another 6.8% drop in oil prices. Not only did the equity market outperform oil, but more significantly the ruble did too. What happens next?
Of course Europe remains front and centre, with Spain now having formerly requested banking support, and now Cyprus completing the expected step of requesting help. As Uruguay automatically needed help when Argentina defaulted in 2001, so Cyprus is unable to sufficiently insulate itself from Greece.

This week we have a European summit which, dare I say it, might bring clarity needed to stabilise the European market in the short-term. The topics on the table: banking union, unified fiscal constraints and ultimately political union, reflect the full array of issues that the market ultimately needs resolved. Clear commitments on these points would ultimately allow Germany and the IMF to engage more proactively in resolving the fiscal crunches underway. This would not solve the growth problems, but it would be a clear step forward, perhaps allowing other markets to follow their fundamentals.

One great buy then would be Russia. The recent changes in the oil price have brought the curve back into contango (futures prices are higher than spot prices), highlighting a sense that traders may now believe the commodity is oversold. This dynamic likely explains the slowdown in the ruble’s descent, and justifies increased investment allocation, at least in this investor’s view.

We are not yet clear of the risks, even if the European summit ends well, the US is facing an economic cool off that is an increasing concern. But, the emerging markets are better positioned to stimulate and have begun doing that. Once again they can be expected to contribute the bulk of the economic demand that will bring stability. We are at your disposal for any investment questions you may have.

Best regards,


Market Comment 18 June 2012

Posted late this week, sorry…

he world keeps turning. The markets again performed very well last week: the S&P 500 Index rose 1.3%, the Eurostoxx 50 rose 1.7% and Russia rose 3.6% (giving it nearly 10% upside in the last two weeks). Interestingly, oil lost another 0.8%, as OPEC failed to cut output at its regular meeting. Rather than being indisputably positive news, the market rally rather reflected expectations that the world’s central banks would pump money into the system if the results of the Greek election were negative.

As it happens, Greece voted to stay in the Eurozone, and the pro-austerity parties are working to quickly form a government. This was a celebration of rationalism – the idea of an extreme party taking charge in Greece was a concern from both economic and social angles. At the same time, the Greek outcome leads to a less decisive path forward. The European crisis will continue largely unchanged, with political parties moving slower than markets want, and slower than economics require.

What is more, the rally we experienced last week largely reflects the elimination of melt-down risk. We could continue to see prices edging higher in the near term, but the easy gains have been made. Equally, the sharp sell-off that many hoped for is unlikely to appear in the immediate future, and markets remain a challenge for all.

How to invest in this dynamic? Acknowledging that risks remain high, I am cautious on equities. The most benign outcome will see the US and Emerging Markets decoupling from Europe once more. In that case, holding high dividend and large global stocks continues to make sense: the US should continue to expand, China is in a stimulatory phase and Russian retail demand has remained high.

More specifically, the so-called “risk-on” currencies probably represent the best bet. The ruble has lost more than 6% against the euro since March, the Polish zloty nearly 5%. These economies are tied to Europe, but driven by the healthier parts of the single currency block and are subject to relatively vibrant internal demand. Of course, further panic in markets might cause these currencies to slide more, but the fundamental value is already there, and longer term these currencies (and their respective bond markets) look far more sustainable.

The world keeps turning – new markets are economically stable – but the markets have yet to learn the new tune. Even in today’s challenging and often intimidating climate, we are ready to help you find attractive solutions.

Best regards,

Market Comment 12 June 2012

At the time of writing the markets are higher on the day. They started the week higher, traded down and now they are rising again. This uncertainty is exactly what we predicted for the week before the Greek election. Last week, we experienced positive stability as markets foresaw an assistance package for Spanish banks. The S&P 500 rose 3.7%, the Eurostoxx 50 climbed 3.6% and Russia rose 5.9%. The euro stabilised (up 0.7%) and oil rose 1.1%.

This week, as mentioned, we are struggling for direction – an issue that most expect. The media has pinned much of this uncertainty on the conditions of the Spanish bank rescue, but that move was: a) priced by markets last week, and b) not designed to drive financial markets, rather to halt the removal of deposits from the Spanish banking system and lift the overhang of uncertainty over Spain ahead of what may be a volatile time.

So, our focus is on the Greek election. Investors are uncertain how to play it because a black-out on Greek opinion polls reduced clarity about how the nation’s mood is evolving. There is a possibility that the election will lead to the selection of anti-austerity parties, which will bring a swift confrontation with Europe, leading to a quick exit, but the more likely course is that the election will bring no clear decision about Greece’s ongoing struggle. Either way, it is hard to imagine any large wave of positive sentiment hitting the markets this week.

Equally interesting is what comes next. While the Greek election is on Sunday, the FOMC will make an interest rate decision on Wednesday (20 June). If the Greek election unleashes turmoil on markets, the Fed meeting will nicely time to provide policy support. Chairman Ben Bernanke’s comments last week should not be read as a sign that further easing is not being considered, rather that the Fed would prefer not to let markets pre-empt policy shifts that are dependent on future political and social developments around the world.

We have a cautious stance this week, but we are planning our strategies as we expect the market to create excellent buying opportunities in the coming weeks. Markets are already cheap, but keep your powder dry, and watch all risky assets. If there is a strong sell-off, we will go for cyclical companies – mainly commodities stocks. If the market movement is less dramatic, we will continue to favour high dividend stocks and bonds.

Best regards,


On TNK-BP And Russia

This comment appeared as an article in today’s edition of The Moscow Times:

BP Is Moving Forward, Not Stepping Down

06 June 2012

By James Beadle

The timing of the latest bout of tension in the TNK-BP partnership is surely no accident. It comes immediately after the switch of Russia’s ruling tandem and the announcement of seismic shifts in ministerial and state company control. Sector analysts continue to mull over the outcomes, but BP’s adventures in Russia have always been something of a “canary in the coal mine,” shedding light on the country’s investment environment.

What does the current turmoil tell us about Russia’s evolving investment prospects?

Many global companies have engaged in the Russian market since the fall of communism, but few have shed as much light on the country’s investment climate as BP. Media headlines have mostly focused on the negatives, and there have been many. Yet, while these negatives provide interesting insights into the challenges inherent in the Russian business environment, positives have been ignored: BP has extracted $18 billion of dividends from its Russian partnership and stands to exit at more than four times its initial investment level. An internal rate of return in the region of 30 percent is not bad for a nine-year project. Its participation has also benefited Russia, as skills and technological know-how have completely revitalized TNK’s business.

Much of the turmoil has been caused by strategic divergences. The Russian partners were happy with the progress of their existing operation but wanted to expand internationally because of the lack of new opportunities in Russia. BP, of course, has a large global footprint and wanted TNK-BP to focus on developing its core assets in Russia. Over the years, there have been many missteps by both parties, and the relationship has deteriorated. The risks have been clear, but the rewards have also been high. Why would BP exit now?

The Russian energy sector is currently undergoing a major shift. As it does so, the opportunities for further growth that fit BP’s skill set are elsewhere and managed by other companies. Predominantly, they are offshore and in the Arctic region. At present, BP is unable to participate in these projects without using the TNK-BP structure, but it is BP’s core strengths that will be of value, not the competencies it has built up in TNK-BP.
The reality, then, is that BP has outgrown TNK-BP. It took a struggling post-Soviet operation and turned it into a more efficient and profitable enterprise. Now it wants to exit the venture at a fair market price, locking in its gains and moving on to create value in other areas. This is a standard corporate behavior and fits well with investor interests in transparent, well-managed companies. Exiting the joint venture would not represent a step down, but a move forward.

The owners of AAR also stand to benefit from this move. Their troubled relationship with BP has contributed to higher risk premiums that have suppressed the value of Russian assets. As previously mentioned, the lack of strategic direction has also inhibited their ability to develop the business as they would like. It is probable that a new shareholder structure would allow them to acquire the marginal stake necessary to prevent the recurrence of recent problems. What’s more, the partnership agreement gives them de facto veto power over replacement owners, so they will be able to filter prospective bidders to find a partner with a common vision.

Rosneft may also benefit, even if it does not become the new partner with AAR. The company has repeatedly shown interest in buying into the joint venture but has not confirmed that it is bidding at present. Rather, the benefits to Rosneft would come elsewhere, perhaps in gaining BP as a partner for developing complex and technologically challenging projects in remote areas.

Russia as a whole would benefit as well. For years, the 50-50 joint venture between BP and AAR has been a thorn in the side of the country’s investment reputation. Direct government intervention would certainly have upset the country’s fragile balance of power, harming either the largest foreign investor or one of the country’s most powerful business groups. The state maintained a hands-off approach, leaving the two owners to fight it out. But this put the country’s weak institutional framework and underhanded corporate negotiating tactics on newspaper front pages around the world. If BP and AAR can finally divorce, these issues will cease to attract such negative attention. More significant, future corporate partnerships — particularly in the strategically important energy sector — will surely come with clearer ownership control structures, protecting them from such complications.

It is not so much that Russia will become a more open and transparent place to do business, but the 50-50 agreement, which was once such a shining example, has become an anachronistic burden. It gives rise to problems that other foreign investors don’t face.

In that sense, a divorce is arguably good news for investors, too. The joint venture has provided an informative expose of how businesses can clash in Russia, but the corollary tale of improved operations and huge profits came in a pale second to the gripping battle for strategic direction. Russia is a high-risk, high-return market, but the issues at TNK-BP shed excessive light on only one side of the coin.

The rules in Russia are constantly being challenged and developed. Despite the acrimonious disputes it has unleashed, the TNK-BP relationship contributed much to both its owners and the nation’s development. Its troubled ending represents the beginning of a new era rather than a downshift in the country’s investment climate.

Market Comment 4 June 2012

Our optimism was clearly misplaced last week. The S&P 500 index lost 3.0%, while the Eurostoxx 50 lost 4.3%, and the euro fell another 0.7% against the dollar, but in fact had fallen considerably lower before rebounding on weak US jobs data: As expectations increase of further stimulatory activity in the US, so the one-way trend to sell euros will lessen.

The story was more cheerful in gold, which climbed 3.2%. The precious metal is behaving very much as it has done in previous crises: first it sells down hard, denying safe-haven perceptions, then it climbs back. Whether this gold rally continues depends what phase of current crisis we are actually in. Oil also had a bad week, losing a stunning 7.9%. This sharp fall was to be expected as the world has been oversupplied for an extended period. With Brent below $100/bbl, Saudi Arabia should move toward reducing production, but oversupply going into a crisis is a volatile mix. I would not be surprised to see oil go lower before it stabilises.

So what might we next expect? Looking at both technical indicators and historical experience, it would be premature to look for equity market improvement this week. Technical thresholds have been breached, and as with last year, there is clearly a danger that the market will continue to decline for a more extended period.

Markets are increasingly ready for Greece to exit the euro. Although many expect this to cause a potential credit freeze (a so-called “Lehman Brothers event”), we are less pessimistic. The bankruptcy of Lehman Brothers caused a shock because it was widely viewed as an impossibility, so no one was prepared for it. The market has had time to prepare for Greece’s exit. Volatility would still occur, but if the contagion can be contained, then there is a chance this event could prove a page-turner (bringing an end to several immediate crisis issues).

For now, the US and Emerging Markets are both suffering from the nervousness unleashed by Europe’s woes. But, both are sustaining positive, if weaker economic growth. Europe continues to move too slowly, but soon global weakness will weigh on German growth, encouraging it to push for more immediate resolution. Meanwhile, the adjustment process continues.

Gold continues to offer value, and we continue to favour emerging markets. Globally, corporate performances remain far healthier than macro statistics. Dividend stocks continue to offer stable incomes and high longer-term potential.

Best regards,

James Beadle