First mea culpa, this
blogging on a regular basis is a lot harder than it first appears. How Leo
Kolivakis at Pension Pulse can do it every day is beyond me. As it used to say
on my old school report – “Must try harder”
Second mea culpa,
I also got the Ukraine situation badly wrong – the worst I foresaw was what
euphemistically gets called “Collateral Damage” and we are certainly beyond
that now.
Despite the situation having deteriorated farther than I
anticipated, it hasn’t driven the markets down any farther. The attached chart
of the Gazprom GDR shows that following the initial drop on the invasion of Crimea it has mainly ignored recent events, although
volatility has picked up.
We have hung on to our basic positions in Russia, but
more recently we have been “renting” stocks to take advantage of the volatility
– buying small positions on down days they selling them out when they bounce;
ideally we would be doing this as part of our option overlays, but there aren’t
enough listed options on the GDRs.
Few precise details have emerged about the recent gas deal
signed between Russia and China, but a couple of analysts who have run their
slide-rules over what little we do know have suggested that it is at best a
breakeven deal for Russia. Given that Putin was very keen to show the West that
he has other choices of “friends”, it would not be surprising if China were
able to drive such a hard bargain; in short, Gazprom remains a continuation of
State policy by other means and as such will remain very “cheap”.
Some commentators have tried to use the deal to paint
President Obama in a bad light – weak, ineffective, etc – the Realpolitik is
that there is very little more he could do without Europe taking a stronger
stand and there certainly doesn’t appear to be much appetite for that currently.
Ironically, President Reagan warned of this kind of impasse when Western Europe
first started negotiating to import Russian gas back in the 80’s
Now that Sunday’s Presidential Elections have returned the
pro-European Petro Poreshenko things should calm down for a while. The forced
closing of poling stations in several of the pro-Russian strongholds, such as Donetsk
and Lugansk, only serve to legitimize a government that will probably be just
as corrupt as the last one. It doesn’t make Russian stocks a screaming buy, but
they should move slowly higher as things “normalize”
In recent weeks we have observed the Brazilian market get a
bounce every time Dilma’s approval ratings drops, or word leaks out that
preparations for either the World Cup or the Olympics are going badly; FIFA has
said publically that the preparations for the World Cup are the worst they have
ever seen, whilst the IOC has apparently informally approached the UK to see
how quickly they could bring back on-line the facilities used last time around.
Congress has opened an investigation into the purchase of a
refinery in Pasadena TX when Dilma was the Minister for Mines and Energy and
Chairperson of Petrobras. The company was forced to acquire 100% of an
operation they only wanted to acquire 50% of, paying out $1.25BN instead of
their expected $360M, for an asset that was possibly only worth $42M. As a
long-term follower of Petrobras, none of this surprises me.
Expectations of a first round win for Dilma have faded,
although she is still currently expected to win in the second round. IF the
Government is forced to introduce any kind of electricity rationing because of
the poor rains, the October race will be wide open. Dilma, again in her
previous role as Minister for Mines and Energy, intervened in the market to
ensure that returns on investment were below those required to bring in new
capital, so now the country faces a shortage of back up capacity and a $20Bn
subsidy bill.
I remain confident that the World Cup will be a success, in
the sense that it will happen, someone will win, and that people will have fun.
Should Brazil get to lift the trophy again, they will probably deem it to be
the greatest series ever.
I am happy to see the election of Narendra Modi as the new
Prime minister of India. To call the Gandhi clan that has been at the core of
India’s mismanagement for so long “tired and corrupt” would be an
understatement. India needs someone who is not permanently trying to hold the
poor back, but is actively trying to give them opportunities. Modi comes with
baggage that is for sure, but he deserves the benefit of the doubt at this
stage.
I used the bounce in many of the Indian names in my
portfolio to cut back exposure, not because I doubt Modi’s abilities, but
because I recognize that he has a herculean task ahead of him. Despite all the
good wishes, we won’t know if he is actually going to be successful for quite a
while as the vested interests fight to maintain their privileges.
Finally, I am surprised it took the Thai military so long to
intervene in the dispute between the Government and their opponents. Given how
the country has become increasingly polarized whilst the economy has slowly
stagnated - the State Planning Agency
recently announced that the economy has slipped back into recession – it was
only a matter of time before they stepped in.
