Trouble in Brazil?

The Brazilian economy, already in the grip of a significant recession, has suffered another blow with the downgrading of the country’s credit rating to “junk” status by Standard & Poor’s. The decision follows failed attempts by President Dilma Rousseff and her government to get on top of the country’s debt problems.

This has been quite a turnaround, with an investment-grade rating having been issued as recently as 2008, at which point the economy had been on the up. What has followed, however, with commodity prices plunging and austerity measures kicking in, has seen the economy entering a downward spiral.

It had been expected that such a downgrade might occur, despite the implementation of austerity measures that had been intended to shore up the failing economy, but the earlier than expected decision comes as a considerable blow. Brazil has the largest economy in South America and had, until relatively recently, been seen as a real flag-bearer for emerging nations.

It’s expected that the Brazilian stock market will react with a big plunge and S&P have declared that there is a substantial credit risk for investors. Indeed, there is a possibility that further downgrades may yet follow.

But how it come to this? There is no doubt that S&P have taken into account a flurry of negative announcements, with the state of the Brazilian economy a cause for real concern in the region. Even optimists are suggesting that no recovery should be expected within the next two years.

Some have seen a need to get inflation under control and the President has made use of an austerity programme, in order to achieve that aim. However, that programme is receiving criticism from all sides: even those who are allied to her politically have been distancing themselves from the programme.

The downgrade now means that ratings agencies are broadly aligning the Brazilian economy with that of Russia, which has clearly been under close consideration in recent months. If the current direction of travel continues then it may only be a matter of time before institutional investors are forced to withdraw their investors.

In the face of this latest crisis, government ministers have been keen to try to soothe worries. They have indicated that Brazil will meet all of its financial obligations that its investment-grade rating will return as soon as there is an upturn in the economy. Analysts will undoubtedly be looking on with considerable interest.

Switching off in the summer months?

Have you ever heard the phrase “sell in May and go away”? This is a popular phrase in investment circles and implies that there is often a downturn in the stock market during the summer months. This seasonal behaviour is often given as a reason why you should seek to sell all of your holdings in May and then forget about things for the next few months.

When you return in the Autumn, it is to be expected that you will have avoided what otherwise would have been trading losses. Is there any sense to this advice? Almost inevitably, when people come to answer that question they will tend to look at very recent performance levels. If the advice looks to have held good the previous summer, then there are always some who will immediately assume that it is always certain to be correct. By the same token, one great summer might be taken as an indication that it is advice that is best ignored.

There has been some evidence over the years (based upon the Dow Jones Industrial Index) that does suggest that returns are considerably lower during the summer months. Is there any reason for this? Is there strong evidence to suggest why this should be so?

There may be a danger, of course, this has become what is known as a self-fulfilling prophecy. As more and more people withdraw from their holdings during these months of the year, it might be expected that share prices would necessarily fall. There will doubtless be much consideration of whether we see the same being replicated during the coming few months.

What you can certainly expect to see is further discussion of popular trends, phrases and thoughts. That’s what we’re here to bring you.

Nevsky reporting until 31 December 2014

If you are an investor with Nevsky Capital then it is perfectly natural that you should wish to understand the nature of the fund, in order to define reportable income. This is a core piece of information that is made available in a public manner, helping to keep you on top of the requirements that come your way.

If we look at the specifics here, then we begin with the Sterling Class Shares, which have an ISIN of IE00B400QV09 and a HMRC Reference of N0026-0002. As the same suggests, these shares have a currency of GBP and the declaration to 31 December 2014 shows a per unit excess reportable income over distributions in respect of the reporting period of 0.0000. All per-share figures are reported, as can be seen, to four decimal places, using the relevant currency.

The fund distribution date is recorded as 30 June 2015, while the fund is marked as remaining a reporting fund at the date when this distribution is made. The fund does not, however, meet the definition of a bond fund at the date when this report is made available.

How does this compare with other funds within the Nevsky Capital umbrella? First, let’s turn our attention here to the Euro Class Share, with an ISIN of IE00B3W1G920. Make a note of the unique HMRC Reference, which is showing as N0026-0003. The currency of this share class is Euros (EUR), while that excess reportable income is shown as 0.000 here too. You need to be aware that this fund is also a reporting fund at the date when the distribution is made, but that it does not meet the definition of a bond fund. The distribution date is declared as 30 June 2015.

Finally, we take a closer look at the US Dollar Class Shares, which have an ISIN of IE00B42ZNM31. The HMRC Reference that you’ll need here is N0026-0001, with the currency of the Class Share obviously being US dollars (USD).

Once again, the excess reportable income is recorded as 0.0000 and the distribution date is 30 June 2015.

The senior managers at Nevsky Capital, including Nick Barnes, are well known to many within the industry and beyond.

Martin Taylor - Nevsky Capital

The meaning of investments

What does investing mean to you? For many, this is a term that they will have been familiar with since childhood. There may have been time spent at home listening to parents or other family members discussing investment decisions.

That’s the type of learning experience that can be surprisingly constructive and useful. Although the imagination may suggest that listening to the odd few pieces of conversation about stock market indices and balance sheets will have had a very limited benefit, that needn’t be so. A child can pick up much, in terms of the language, concepts and even acronyms that are in common use.

But this is not to say that it’s critical to start an investment journey at a young age. It may prove useful to be immersed in a world of business and enterprise in early years, but those who have not received the benefits associated with such knowledge can relax with the understanding that it is possible to play catch up.

Is it possible, however, to learn about investing by using books as a source of information? There are many that would argue that a book can be used to learn about almost any subject and it’s hard to ignore the fact that countless books have been published in this area. When examining titles and summaries, it soon becomes obvious that they cover numerous different topics.

So there is clearly a challenge here to work out where to begin. You know that you want to learn more about investing, but where exactly will you be making a start? Are you planning, for instance, to become a commodities trader? If so, it seems likely that you will be required to pick up some specialist knowledge.

As a starting point, however, it’s undoubtedly important that any budding investor should familiarise themselves with the basic terminology that surrounds finance and investments. Without that thorough grounding, it becomes incredibly difficult to make substantial progress.

Further reading will also prove impossible until you have real confidence in those basic concepts that are under discussion. Good investors haven’t reached the position that they are in via a few lucky decisions (with the possible exception of a few extreme cases). Rather, they have built up the necessary knowledge to enable themselves to make informed decisions. They have done so because there is a recognition that an increased level of knowledge puts them in a much better position. It allows them to take improved decisions on a consistent basis, offering that advantage over other investors.

That may sound like a rather competitive approach and you may feel that you’d rather help others out. It’s important to remember, however, that there is an almost inevitable level of competition to be faced. After all, a successful investor will usually be one who spots opportunities within markets that have been missed by the majority. They are constantly seeking to take advantage of the mistakes of others, looking to build their own positions. On a daily basis, the situation is not quite as extreme as that may sound, but you do need to remember that your own success will rely heavily on an ability to outdo others who are looking to make significant gains.

When politics and economics meet

To what extent is there a relationship between politics and economics? The impact of politicians on the finances of a country is one of those areas that can appear somewhat fluid. When an economy is thriving, politicians in power are often quick to claim the credit.

A struggling economy, however, is rarely accepted by those in power as being a sign of errors by the government. Instead, attempts are usually made to blame problems on the global economy, or on issues faced by trading partners.

To a certain extent, this may simply be seen as reflecting the problems that so many people have with modern politicians. Is there a lack of straight talking here?

Last year saw the Hungarian General Election take place, with the usual build-up about how many changes might occur after the election. Viktor Orban was looking to maintain his position as Prime Minister, with his Fidesz party seeking to strengthen its already powerful grip on power. Indeed, the clear victory that had been achieved in the previous election had put Mr Orban in a position where he had a mandate to make constitutional changes.

His leadership appears to have become a cause for concern for a number of Western governments. There had been a suspicion that he had been able to adopt an increasingly authoritarian position and it was noted that he had recently praised the economic performance of a number of nations, including China and Russia.

So where did this leave the likely economic situation? Entering the election, there appeared to be agreement among many analysts that Mr Orban would retain his position. This would provide a sense of stability, despite the concerns of some outsiders.

What transpired was, if anything, to be a strengthening of the Prime Minister’s position, with his party successfully defending seats in April and then following that up with local election successes later in the year. As a result, the Hungarian Prime Minister and his party have a renewed mandate until 2018. How has that been reflected in the reactions of markets in Hungary? What impact has there been on the country’s economy as a whole?

Hungary’s annual GDP growth rate for the past year stands at a respectable 3.4%, with the unemployment rate continuing to be very low. The main index for the Hungarian stock exchange, meanwhile, has witnessed a 13% rise in the year since the election.

So the performance indicators all point to a strengthening positioning. But is this anything more than a coincidence?

If you want to understand the impact of politics on the economy of any country or on the performance of any business, then it’s vital that you should follow the situation carefully. When attempting to invest overseas, it becomes even more critical.

 

The practicalities of Eastern European investment

Nevsky Capital offer an approach to investing in Eastern Europe and many different funds seek to focus on very specific geographical areas. But why should you make use of such funds to manage your own investment approach?

One alternative is to seek to invest directly, relying upon your own knowledge to out-perform the markets. Is this a realistic option for you?

It’s certainly clear than many people do take just such an approach. You’ve probably heard about their success stories, or possibly read blogs from these self-proclaimed gurus. When examining real achievements, these are undoubtedly to be admired. We’re all used to treating some claims with a touch of caution, of course, but that doesn’t make genuine successes any less impressive.

What we tend to hear about rather less is those who do not succeed. There are far fewer blogs about the individuals who have invested a small fortune in Eastern European stocks and shares, only to lose all of that money. That’s not because such individuals don’t exist: it’s simply that they are understandably rather less keen to publicise their circumstances. In fact, those who have failed will undoubtedly out-weigh those who have tasted success.

There was a study carried out some years ago that looked at the performance of 10,000 individual investors. The study sought to measure how their performance levels compared with the professionals.

The results of that study demonstrated that stocks that were sold by amateur investors actually performed 3.2% better than stocks that were bought. That appears to indicate that picking your own stocks and shares doesn’t tend to go well, at least in the case of many investors.

But would you have more success if you were to concentrate your efforts in a particular area? It seems likely that a focus of this sort is likely to pay better dividends, since it would be possible to establish significant expertise. This is where the idea of investing in Eastern Europe may come into play. You would have that opportunity to examine businesses operating in a few markets, with each of those markets being smaller than those in the UK or the United States (to take two obvious examples).

The problems associated with such an approach are not be ignored, of course. If you’re unable to speak local dialects, then that may be seen as being a considerable disadvantage. Fortunately, many online translation services can be used to ensure that you have access to written information relating to your target markets, but it’s much more difficult to follow television news stories or to conduct meaningful interviews.

That last point also hints at problems associated with access to key individuals. Can you get into a position where you can actually interview those in senior management positions or local economists who have a suitable understanding of particular markets? You may face an uphill task, making it incredibly difficult for you to manage your investments in an active, meaningful manner.

So the thought of investing in Eastern Europe may sound incredibly appealing, but the reality can be rather less positive. In order to make the most of investments, it seems sensible that so many people seek to use the services of professionals.

Leading financial analysts

When considering which investment companies to use, many people like to follow individual fund managers and analysts. Knowing that there is a track record of success can make a real difference. Although it may not be a guarantee of future performance, it can certainly be helpful in ensuring that you are investing your money, without having that sense that you are stepping into the great unknown.

But how can you go about producing the best results on a consistent basis, when it comes to looking at getting maximum concerns at a risk level that you are happy with. Sticking with those fund managers who produce strong results time and again can certainly work well.

When considering the success of Nevsky Capital, to take an obvious example within the marketplace, there is no doubt that many investors would associate that record of success with the individual input that comes from Nick Barnes and Martin Taylor.

Martin Taylor & Nick Barnes

Martin Taylor and Nick Barnes have worked hard to build up a dedicated following of investors who trust their judgement and ability to make reliable returns on an ongoing basis.

Nevsky Capital

How might we describe the key to their success? Inevitably, investors tend to follow the data and the numbers. A great reputation is built, as a result, on a solid performance that can be measured via particularly visible metrics. Without that sort of information, it would simply be impossible to imagine investors relying on key individuals in this way.

Nevsky's Nick Barnes

For Nick Barnes, there will certainly be interest in continuing to maintain those excellent standards that have been set over a period of many years. It’s only through dedication and consistency that investors can be retained. There is no temptation to look elsewhere, as long as confidence is in place that performance will continue to meet the high expectations that have been set.

It’s natural that other analysts and professionals should wish to replicate what has been achieved by Nick Barnes and Martin Taylor at Nevsky Capital. But will they be able to scale the heights in the same way? One thing is certain: many will continue to follow in the footsteps of those who lead the way. They will do so because they hope to reap the rewards.

Eastern European IPO trends

The relative state of Initial Public Offering (IPO) transactions is seen by some analysts as presenting a measure of how well individual markets are performing. Are businesses keen to float on the stock market? Do investors feel confident enough to plunge their own capital into such businesses?

It has not gone unnoticed that IPO levels have dropped significantly in many Eastern European markets in recent months. From the Ukraine to the Czech Republic, it seems like there is a waning appetite for such flotations. What lies behind the trend?

Wider economic uncertainties are certainly not helpful in this context. While investors fret about the future direction of countries and the region as a whole, they may well feel that this is not be best time to invest. Conditions are unlikely to be conducive to strong performance from individual entrepreneurs either. There may be an element here of new businesses struggling to emerge from the shadows.

A global economy means that IPOs aren’t just about local investors, of course. For those examining options on a broad scale, Eastern European transactions may represent too much of a risk right now. Although there’s always that balance between risk and reward, many evidently feel that the scales have been tipped too far in one direction here.

The state of the Russian economy continues to give cause for concern and sanctions are proving limiting, in terms of economic growth. There is also evidence that the impact here is not only limited to Russia: perhaps unsurprisingly, there are knock-on effects for trading partners elsewhere, particularly within Eastern Europe.

At present, equity valuations tend to be low. Some companies will have responded to this situation by looking to delay IPOs, believing that valuations will increase once the current circumstances subside. There are certainly many anxious glances in the direction of the Ukraine at the moment, with senior managers in many businesses hoping to see greater stability in the medium-term.

Could a few large IPOs trigger others to follow suit? The recent flotation of Wizz Air, the Hungarian budget airline, has given some cause for optimism. Could it represent a sign of confidence returning to the markets? It’s probably too early to tell, but there seems little chance of a rapid recovery in IPO levels for the most part.

Consideration also needs to be given to the privatisation process that has been ongoing in some countries. Taking Poland as an obvious example, recent years have seen Polish governments looking to privatise on a large scale. There may simply be little left to privatise, reducing the potential for this as a source of IPOs. The same is true in Romania, where it’s been noted that the sale of assets has certainly reduced in recent months.

What does the future hold? That’s always the question that most investors want to know the answer to. Looking into a crystal ball, it would appear that the most likely answer here is that the uncertainty that surrounds the economies of the region means that there doesn’t seem to be much chance of IPO levels increasing at a significant rate during the course of the coming months. If the Ukraine situation, in particular, starts to settle down, then that may well present cause for economic optimism.

What next for the Russian economy?

It’s incredibly difficult to predict where the Russian economy is likely to head next, so we’re not going to try and add our limited voices to the general chatter that currently surrounds this topic. However, we are happy to collect together the views of analysts (both economic and political) to try and build up a clearer picture of the road ahead.

The credit agencies provide a useful starting point and you may well have noted that Moody’s decided to downgrade the Russian credit rating last month. The reduction saw a fall to Ba1, which is sometimes known as “junk status” in financial circles. The credit agency made it clear that their decision was related to political uncertainty within the country.

On its own, this might seem like something of a concern. But bearing in mind that S&P recently made the same judgement call and it becomes clear that there is a general view that the future looks pretty bleak. The crisis in Ukraine and the international sanctions that are in place are felt to be having an impact, while the credit agencies continue to suggest that things may yet get worse.

Russian politicians have suggested that the credit agencies are unnecessarily pessimistic, with the Finance Minister pointing out his own view that the situation is nowhere near as bad as Moody’s are suggesting. It’s also noted, however, that Russian government ministers have reacted strongly in recent months to the threat of increased sanctions.

Meanwhile, EU leaders have come under some pressure to keep the sanctions in place, in order to try and influence the situation in Ukraine. EU sanctions are due to end this summer, with some European governments apparently keen to see them lifted, in a positive reaction to the ceasefire in Ukraine. It’s clear, however, that there are others within the European Union who remain less convinced about taking such immediate action.

Those sanctions have had a knock-on effect for a number of Eastern European states and there is an acknowledgement that governments in Bulgaria, the Czech Republic and Hungary have mentioned that their own countries are feeling some pain. Many German companies, with close trading links with Russia, are also believed to have been adversely effected by the sanctions that are in place.

The Russian Rouble is currently priced at more than 60 to 1 Dollar, which represents a truly remarkable rise. Just 12 months ago, the exchange rate stood at little more than 35 Roubles to the Dollar. As might be expected, given the circumstances, the inflation rate is also rocketing. The reported annual rate exceeded 16% in February, having stood at less than 7% in April 2014.

Looking at the various pressures on the Russian economy, it seems that analysts are in broad agreement that there is likely to be uncertainty ahead. With high rates of inflation, low oil prices and continuing sanctions, there may not be much light at the end of the tunnel. However, those European nations that are also suffering as the sanctions continue may wish to bring about a change of direction.

Notes on Asian markets

The various markets of Asia have seen some volatility in recent years, causing many investors (both professionals and amateurs) to reconsider their investment approach.

An examination of current trends can be used to provide guidance as to future performance levels, but there seems to be increasing concern about the overall direction of travel. What next for the markets of Asia? In this insight piece, we take a closer look at emerging patterns and likely future trends.

Japan’s GDP growth rate has seen considerable fluctuations in recent quarters, only emerging from recession in recent months. A growth rate of 0.6% during the last quarter of 2014 has encouraged many investors and economists to see a brighter future for the Japanese economy. With continuing decreases in housing investment and concerns about tax rates, however, it’s evident that there is considerable caution associated with looking too far ahead.

The Indian economy continues to see a significant pickup, although it’s noted that the country continues to run a substantial trade deficit. This can be attributed to the increase in non-oil imports that has been seen in recent months.

Indonesia has been hitting the headlines because there has been considerable growth in consumption, although some analysts are suggesting that the situation may not be quite as robust as it first appears. Household spending has not been rising steadily in those areas where pricing appears to be dependent on oil, or where interest rate changes are felt to be having an impact.

Concerns have also been raised about levels of investment and it’s noted that this may be a factor that is currently holding up growth. On the flip-side, however, it’s become clear that some of the growth in the Indonesian construction industry has been hidden by the overall figures. Some appear to be expecting continued growth in that sector.

Finally, attention turns to Thailand. The Thai economy has been altered by lower levels of government spending and it’s noted that the government does not appear to be hitting the sort of spending levels that have been hinted at in recent statements. It’s unclear whether there is any real hope of this situation changing soon and it is perhaps understandable to see the cautious approach that is being taken by some analysts.

There are particular concerns here, given that the Thai government has set out a policy of looking to boost economic growth via increased infrastructure spending. If those improved levels of infrastructure spending are not being witnessed, then it seems fair to question future trends. Many industry insiders are understandably keeping a close eye on events.