Focus on falling oil prices

As we write this article, the price of Brent crude oil has fallen to $54 per barrel. Just a year ago, the price stood at more than $100 per barrel. As recently as November, it stood at in excess of $80 per barrel.

The fall in the price of oil has been dramatic and has caused a number of knock-on effects. As investors, it pays to be aware of these impacts and to look ahead to what may happen in future.

The impact on Russia

There has been considerable focus on the impact of this fall on the Russian economy. There is no doubt that the Russian economy has been hit hard and that this reflects the dependence of that economy on oil exports. Clearly, the falling price of oil is unhelpful to the wider Russian economy.

It is predicted that Russia will enter recession during the course of the year, although it’s noted that policy makers have resisted the temptation to decrease oil supplies. With some estimates suggesting that each dollar fall in the price of a barrel of oil wipes out $2 billion in revenue for the Russian economy, there is no doubt that Russia is feeling a certain amount of pain.

Interest rates have risen, in order to shore up the currency, which will certainly make it more difficult for Russian businesses to raise capital and to be successful.

Shale extractions

The falling oil price is, in part, a reflection of increased levels of extraction in the United States. The use of fracking has seen production levels sore, flooding the market with cheaper oil.

But there is an aspect of this change that causes concern for US producers: fracking is more expensive than traditional forms of oil extraction and there are fears about whether some new entrants to the market can remain profitable as these levels, as the price of oil continues to drop. Some suggest that the OPEC group are happy to allow the oil price to settle at a lower level, in the hope of driving some US fracking operations out of business.

Saudi Arabia

It’s notable that Saudi Arabia, the world’s largest oil producing country, has not taken the step of reducing production. A reduction in Saudi oil production would undoubtedly support the oil price. So why have the Saudi government not reacted in this way?

As mentioned above, they may be playing a longer game here and be looking to apply pressure to US producers.

Back in the UK

There has been some talk of North Sea oil platforms being taken out of operation, simply because oil extraction off the coast of the United Kingdom is relatively expensive. Such decisions will clearly put UK jobs at risk.

Consumers, however, will continue to benefit from lower oil prices in the short-term. Many of the products that are sold in the UK’s shops, for example, are now being produced for less money. The cost of energy and petrol for residential and commercial users has also been dropping. With more money in the pockets of UK residents, as inflation tumbles, it may be that those consumers are in a position to spend, which should benefit some UK businesses.

Are you heavily exposed to businesses that rely on oil prices staying within a particular range? As ever, diversification may be the key. But the reality is that so many businesses and markets are impacted by oil prices that it’s hard to escape the need to look more closely at this issue.

What does the future hold?

Analysts have mixed views, with many predicting that oil prices may yet go lower. Others predict that market forces will almost certainly mean a longer time increase to the sort of relatively stable levels that we’ve become used to during the course of the past few years.

When you look into your own crystal ball, what future do you see for oil prices? Your own investment decisions may well depend upon that particular vision.

Where next for Russia?

It’s been more than four weeks since our last post on the subject of growing uncertainty surrounding Russia and the Ukraine. Has anything become clear since?

In political terms, it seems that significant changes have been made. As was previously the case, it seems to us that this is not the place to ponder politics in great detail. However, what we can say is that there are still further changes to come. Until the situation in the Ukraine settles down, it’s hard to imagine a similar stabilisation within Russia’s financial markets.

The repercussions are likely to continue too: there are clearly implications here for neighbouring states, together with international relations. With accounts being frozen and threats being made from all sides, it seems unlikely that the situation will settle down any time soon.

Are we any further forward as a result? An observation here would be that markets rarely react well to such elements of uncertainty. This doesn’t mean that those investors with an ear to the ground will find it impossible to find value within such markets, but it undoubtedly means that we can expect to see increased levels of caution.

When it comes to our own focus on the approach taken by Nevsky Capital in such circumstances, there’s a desire here to learn from the tactics of professional investors. Many private investors are also likely to be following their lead, seeking to get an insight into what the future is likely to hold.

For Russia, it’s clear that many more changes can be expected. Judging the nature of those changes remains difficult and it may take bravery to step in to some investment opportunities right now. What we can say with real certainty, however, is that financial and political analysts will continue to monitor ongoing events. The next few months and years will undoubtedly provide some interesting news stories.

Volatile Russian markets

The recent headlines being made in the Ukraine are clearly of interest to those who wish to invest in Eastern Europe. It should be noted that this blog is certainly not the place for a discussion on the political merits of decisions that are being taken in that part of the world.

However, the financial ramifications are certainly of importance and it’s right that they should be given due consideration. After all, an understanding of what’s going on could lead to a greater insight on the investment opportunities that may be available.

As has been written elsewhere, one of the knock-on effects of the crisis has been the falling value of many shares on the Moscow stock exchange. Some analysts have attributed such falls to the sanctions that have been announced by a number of Western governments. Again, without looking too closely at the nature of such sanctions, it does seem reasonable to ask whether there is a need to consider the impact here on investors.

The future of the Ukraine

For those who are looking to invest directly in Ukrainian companies, there’s a high degree of uncertainty right now. Few people could claim to have an understanding of how the situation will resolve and what it will mean for businesses that are local to that area. What we do know, however, is that markets and investors rarely like a high degree of uncertainty.

Until the crisis reaches a point of resolution, it seems reasonable to expect that share prices will continue to fluctuate.

The impact on Russia

Much of the focus of the news headlines has understandable been on the people of the region and how their lives might be expected to change. Much analysis has been carried out on the Crimean region, in particular.

But what about the impact on Russia? Tumbling stock markets rarely lead to positive headlines and it might be expected that investors will flee, looking for alternative safe havens.

This undoubtedly provides an interesting situation for fund managers and others with expertise that is region-specific. For the most part, their expertise will mean that they will have been aware of what was brewing, well in advance of this coming to the attention of the wider public here in the UK. What that should mean is that they were already making investment decisions that took into account the amount of risk that was involved.

Conclusions

The biggest losers here, in purely financial terms, are likely to be amateur investors. While professionals may have had advance warning of the looming crisis, it’s to be expected that many amateur investors will have witnessed these events from afar, with a combination of surprise, outright shock and obvious concerns.

This is very much a live situation too. Until events settle down, it’s very difficult to know whether there will be a real long-term impact. For those who are reliant on professional Fund Managers, the hope is that those experts have done their research.

For those who are investing directly in the region, it’s time to look more closely at what’s going on, in order to allow the correct actions to be taken.

 

Judging Emerging Markets When Making Investments

It finally appears that one of the most challenging and protracted recessions in modern times is coming to a close. Thus, there are many individuals who may be considering a rather serious foray into the investment market. While it is indeed true that there is a good amount of money to be made in such a way, there are a few factors that should be carefully considered before any such venture.

A Look at Emerging Markets

First of all, it is important to understand the term “emerging market”. It can be used in two different ways. Some consider that as we are exiting a recession, we are currently in an “emerging” market. Although this is true, an emerging market is more commonly referred to as a niche sector that is undergoing or is expected to undergo a substantial amount of growth. Obviously, placing oneself in an entry-level position in this situation can lead to a good deal of profit.

Martin Taylor presenting

Martin Taylor presenting

The Commodity Question

Many individuals have touted the commodity market as being one of the most reliable and stable forms of medium- to long-term investment. In fact, this is quite true. Historically speaking, the prices of precious materials, oil and minerals tend to rise. So, many first-time investors will choose to diversify a portion of their portfolio into this sector, for it can help secure growth over time.

However, keep in mind that what goes up will come down (an example of this can be seen in the massive drop in the price of silver by the ounce in recent years). Even commodity markets will suffer their fair share of falls; particularly if the manufacturing industries or the physical demand slows. Keeping a close eye on any emerging technologies and understanding the raw materials that they may require is an excellent way to become involved in a commodity and turn a handsome profit.

A photo of Nick Barnes

Nick Barnes of Nevsky, at a conference

Forex Trading

If commodity trading can be considered a long-term investment strategy, Forex (or currency) investments are on the other end of the spectrum. In essence, a Forex trader will closely follow trends in the prices of currencies around the world. Should a gap between two different types of currency exist, one or both may be purchased under the premise that subsequent changes in price will accrue a profit.

Also, a Forex position can be used to capitalise on an emerging market such as shale oil (as this commodity is listed in dollars, any major announcement may cause the dollar to quickly strengthen). This market operates twenty-four hours every day and is considered to be by far the most liquid available. As a whole, investors will generally not place a great deal of money into the Forex sector; they will rather use a small position to possibly obtain a reasonably high turnaround.

Still, the short-term nature of this strategy will involve a much higher degree of risk. This is the reason why any such position should be established only after careful study or under the guidance of a professional.

These are but a few examples of how emerging area can be judged in different sectors of the marketplace. Naturally, all risk can never be eliminated with any investment strategy. It is nonetheless possible to experience success should these opportunities be approached with prudence and foresight.

Emerging markets: where will they head this year?

It’s tempted to think about emerging markets as offering the best prospects for growth in 2014. It’s certainly been the case that many positive investors have been happy to buy shares in India and associated countries.

But there are also fears, particularly surrounding Asian economies. In recent years, many countries in the region have been able to reap the benefits offered by foreign investment. What happens, however, if that capital starts to get removed? It’s an interesting question and one that is causing some concern right now.

We should also probably stop at this point to state that there is also an issue surrounding just how positive all that investment has been. The exploitation of natural resources, for example, has not always been welcomed by environmental groups. Although we may primarily, within the pages of this blog, concern ourselves with finance and investment issues, it’s also clear that we can’t ignore wider problems.

So what may happen? The fears are not restricted to a single nation and it’s noted that there are worries surrounding the value of Argentina’s currency. Should we be any less concerned about the sort of political instability that is to be found in Egypt? What happens if the commodities produced in Brazil see a fall in value?

Of course, having the confidence to answer such questions almost immediately means that you will be involved with making predictions and deciding on individual investments. It’s an area that some of us are rather wary of. After all, there are often other events that take over.

This may help to explain why many Fund Managers find themselves spending a lot time thinking about politics. A failure to understand the risks that are associated with political decisions would mean that it would be absolutely impossible to make informed decisions about investing in those very markets.

If you want to buy shares in a company in Turkey, for example, then how could you seek to do that without knowing how the central bank in that country has been behaving? This is probably a good argument for making use of the expertise offered by those in senior positions at Nevsky Capital and other such investors.

What it does mean is that we seem to be facing a period of some uncertainty. It’s often stated that markets are rarely keen on uncertainty and this can certainly be seen to be true. How you go about thinking about these issues may be rather central to your own aims for the coming year.

How do you react when investments go badly?

Before you invest any of your hard-earned (or easily won, for the lottery winners amongst you!) cash on the stock market, there is one thing you should know.

There are no guarantees with the stock market. Even if you are investing in low or medium risk shares, that are expected to make a small but steady profit, you can still end up making a loss; or even losing your entire investment.

Before investing in the stock market, you should be aware that you can lose your whole investment sum, or perhaps even just break even, ending up with the same money that you started with.

Check out stock brokers and the companies that you are going to be investing in, to make sure that everything is legal, above-board and proper. Spending a few pounds on having a lawyer check out a contract will seem like a very worthwhile expense compared to losing all your savings.

However, all this advice is for before you invest. What should you do if you have invested and it has all gone wrong? First of all, check your overall finances and take steps to ensure that you can meet all your immediate expenses. Hopefully, this step will not be necessary as you should never, as the saying goes, have all your eggs in one basket.

Do not allow your one bad experience to embitter you against the stock market. Rather, learn from the experience and choose a wide range of stocks and shares instead for your next foray into the market. If you chose your ill-fated stocks personally, perhaps bow to the greater experience and knowledge of your broker in the matter of choosing the stocks and shares to include.

Whenever you do get your fingers burned in the stock market, make sure that you stay up-to-date with the financial news and be aware of all the clauses and exclusions in your paperwork. If the stocks you invested have failed due to fraud, for example, you may be able to put a claim in when the case comes to court. You may not get all your money back, but getting some of your funds back will ease the sting somewhat!

When making investments do not be dazzled by the possible returns. If any deal seems too good to be true it probably is! Be very wary of conmen, offering great returns on secretive deals.

If someone wants your money honestly, they may indeed want to keep it quiet and hush-hush, but they owe you, their investor, a full and honest disclosure of how your investment will be spent, how quickly they will start making a profit and how quickly you will get your money (plus interest) back again. The same applies to the stock market – if you cannot see or understand how they will make the enormous fortune they are promising it is unlikely to be a good deal for you!

To summarise, if you have lost some money on the stock market you should get straight back in the saddle again. Choose your stocks carefully, giving your broker’s advice a fair hearing, and only invest as much as you can afford to lose – think of the stock market as an enormous casino, where you are having a bet! With that in mind, you are unlikely to go far wrong!

Glossary: What is a hedge fund?

You may have heard the phrase hedge fund used in discussions about finances, economics and markets. But what does the term actually mean? In this post, we take a closer look.

It’s basically an investment vehicle that involves the pooling of funds (resources). In company structure terms, they often operate in the UK as Limited Liability Companies, which are sometimes known as LLCs.

There’s no agreed market or sector in which investment can be expected. Instead, hedge funds tend to invest in a diverse range of opportunities. Some hedge funds seek to out-perform particular markets, while there is often a clear aim to produce a positive return on investment, irrespective of wider market conditions.

In general terms, hedge fund ownership cannot be purchased by members of the public. Fund managers will, on some occasions, actually choose to invest some of their personal wealth in the hedge fund. Doing so clearly gives them a very real and personal interest in the outcomes of their investments.

Around 80% of the hedge funds in Europe are operated from the United Kingdom, where they are required to be regulated by the Financial Conduct Authority. There have been more recent talks about changes to EU-wide regulation.

Given the way in which they are managed, there is not usually any requirement for hedge fund managers to disclose the performance results that are associated with their investments. This has led some to claim that there is simply too much secrecy surrounding them, making it difficult to identify how they compare against peers.

To offset such concerns, some fund managers are happy to publicise performance details. There are also a number of magazines and journals that produce summary tables, enabling performance levels to be compared more easily.

As might be expected, the financial crisis of 2007 and 2008 did have a negative impact on the performance of hedge funds. There has been some evidence to suggest, however, that this sector still out-performed many alternative forms of investment, even during this period of time.

Sources of financial news

Most investors want to have reliable, regularly updated sources of information. When considering investing in global markets, it’s not always easy to get access to such information.

There are certainly plenty of websites based in the UK and the US that can come to the rescue. In some cases, it’s necessary to pay a subscription in order to get access to them. Here, we take a look at some popular choices.

Financial News

This is an online publication that offers a reasonable depth of information, although it may not be suited to absolute beginners in the world of investments.

Key topics covered on a regular basis include asset management, investment banking, private equity, trading and technology.

There are also regular special reports, often including interviews with leading names in the world of finance.

BBC Business

As might be expected, the BBC Business website offers good quality explanations of the latest stories, although may sometimes lack the depth of specialist publications.

The large team of journalists available to the BBC does mean, however, that there is good coverage of most financial topics.

Reuters

A key source of information for many, offering quick responses to the latest news stories. As with BBC coverage, investors may feel that there is a lack of depth when dealing with some issues. That’s to be expected, given that the news organisations are often attempting to cover a broad range of subjects.

Reuters news feeds are also used by a number of other organisations. Even if you don’t visit the Reuters website on a regular basis, this means that it’s likely that you will be exposed to their journalism.

The Economist

For those familiar with the print version of this magazine, The Economist online provides the same high quality reporting and insight.

This is, however, provided on a subscription-only basis. At the present time of writing, an introductory offer means that it’s possible to subscribe at a rate of £1 per week.

Financial Times

Content at the FT.com website is also hidden behind a paywall, meaning that you’ll need to pay for access, in order to take a closer look at the stories that are listed online.

A premium subscription is currently priced at £6.79 per week, allowing unlimited access to the website, via desktop, mobile and tablet devices. You will also receive an exclusive letter from the editor, together with ePaper access.

With slightly less features available to you, the standard subscription (currently priced at £5.19 per week) is a cheaper option.

When it comes to investments, it’s important to have information at your finger-tips. With enough knowledge in place, you’ll be in a good position to make better investment decisions.

But how reliable is the information that you currently have? Could it be the right time to seek out alternative sources of information?

Eastern European Fund performance in June

Now feels like a good time to look back on the performance record of the Eastern European Fund back in June. This Nevsky Capital fund had a launch price of $10 back on 13 October 2000.

During the course of June, there was an overall fall in value of 1.4% and some of this figure can certainly be attributed to the relatively poor performance of markets in Turkey during this period. Indeed, Turkish investments saw a loss of 3.9%.

This is a situation where wider influences are undoubtedly having something of an impact. Public unrest looks to have unsettled the markets and the Fund managers at Nevsky will clearly be required to monitor that situation carefully.

An enormous amount will rely on the reaction of Turkey’s government. A situation that could have been controlled has clearly demonstrated what can happen when things get out of hand. That’s something that can have an impact on the Fund, given that there’s an exposure of around 16%.

Better news came from Hungary, with a rise of some 4.7% during the month. This may be seen, to a certain extent, as defying expectations. There appears to be a general weakness in the Hungarian economy that won’t be solved until there are improvements in the situation facing western European economies. That’s reflected in the relatively small holdings at this point in time.

Indeed, Hungary represents only 1.7% of the Fund. The largest holding remains Russia, with more than 50% of total investments. The Financials and Energy sectors represent the markets with greatest levels of exposure.

Meeting the team

With any Fund, there’s a certain level of interest in examining how the situation is developing over time. How are decisions being made and how frequently are those decisions having positive results?

Nevsky Capital's Nick Barnes

Nick Barnes and Martin Taylor provide leadership, directing operations.

Martin Taylor

The decision making process obviously needs to be controlled and analytical. With a suitable knowledge base, it’s possible to make the right decisions. Given the investment strategy that’s being pursued, this means having a thorough understanding of the political situation in central and Eastern Europe, as well as being briefed on changes within companies and markets.

Eastern European Fund Investment Process

For individual investors, the process of choosing the markets, sectors and companies to invest in can seem incredibly confusing. For more of us, the truth is that we will always struggle to understand what’s involved.

In a sense, it’s this fact that ensures that there will always be a demand for professional investors. Those who manage significant funds are clearly expected to make use of their experience and expertise.

With this in mind, it seems clear that out-performing the market requires a level of knowledge that is not available to most of us.

Employees of Nevsky

So how do the professionals make judgements? Looking at information provided on the Nevsky Capital website, it’s clear that there is a structured process in place for making decisions. This can be broken down into a number of areas and involves the following steps:

Primary Inputs

There is a mass of data involved in carrying out proper analysis, including company accounts and broader macro-economic data. Into this mix is put the results of meetings with those involved in particular businesses, together with individuals who are responsible for setting policy.

Analysis

Having all of the above information must be useful, but it would not lead anywhere, without having the knowledge and tools to carry out proper analysis. Here, it seems that Nevsky have a framework in place that always looks to consider management quality and strategy, prospects for growth and the liquidity of any business.

The latter involves considering a diverse range of elements, including balance sheet data.

Forecasts

In order to produce forecasts, specialist software is used. Although it’s impossible to see what the future may hold, it’s presumed that such software is based on the previous performance of companies and that it also takes into account specific knowledge that is held by the team of analysts.

Decision Making

Finally, there’s the need to come to a decision on when to invest and when to let go of a particular investment. The timing must be critical in some cases and it’s likely that such decisions are taken by a team in most cases.

The above is based on reading between the lines on the work done for a particular fund. It’s likely that most fund managers will look to undertake a similar process, although there will be variations from one to the next.

In the case of the Eastern European Fund, it’s clear that there’s a need to hold specific information on different countries. That means knowing what’s happening in the Czech Republic, for instance, in political, economic and social terms.

In some of the countries that are considered, it’s presumably the case that the situation can be quite fluid. Understanding the changes that are taking place will be a key part of the challenge.

The job of a fund manager must be fun at times, but it’s clear that there’s scope for considerable levels of stress. Making the right decisions certainly won’t be easy on all occasions, but the drive here must be to get things right on the majority of occasions, maintaining a certain competitive advantage.

That’s why funds are measured against peers, in order to see whether the right decisions are being taken frequently and whether it’s possible to stay ahead of the game.

The Eastern European Fund is managed by Martin Taylor and Nick Barnes.

Nicholas Barnes adjusts tie