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.

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!

Deciding on future investments

Our recent post, outlining the S&P view of the Eastern European Fund from Nevsky Capital has caused a fair bit of interest. In particular, a number of people have contacted us to ask for more information on how to decide on where to invest.

Although it’s always interesting to receive such emails, we do need to make it clear that we don’t offer investment advice. If you are seeking such advice, then it makes sense to speak with a qualified professional.

We’ve also been asked whether information that is provided by Standard & Poor, or other agencies, can be used to guide an investment strategy. There, it should be said that reports provided by such agencies are only part of the knowledge mix that’s availabe.

It’s also possible, for example, to find plenty of information from a variety of other sources. As with anything, it’s useful to check the nature of those sources, before making deicsions. Might there be reasons, for example, why you should trust some more than others?

You need to think closely about why someone is providing information or advice. Do they have particular motives? It may be that they simply provide factual data, although there is often a cross-over between facts and wider analysis.

For our part, we’re glad that there has been such interest in all of our previous posts. We certainly welcome feedback and would love to hear more of your comments. When making your own investment decisions, however, it’s critical that you should consider your own requirements and that you should seek the best, relevant advice.

The Standard & Poor’s View

We’ve been taking a look at the S&P report that covers the Nevsky Capital Eastern European Fund. It makes for interesting reading and we thought that it might be useful to present some of the highlights here at Nevsky News, where they will be available to individuals and those looking to learn more.

Nevsky Capital Martin Taylor

The report was produced in August 2011 and the opinion offered in the report is dated July 2011. It begins by discussing the fact that the Nevsky team focuses on two funds, with the Eastern European Fund obviously being one of them. It’s remarked upon that there have been substantial inflows into the fund – meaning that more people were looking to invest in this fund. That will certainly have pleased Martin Taylor and Nick Barnes of Nevsky Capital, giving them more scope.

Nevsky Capital Nick Barnes

Indeed, it’s noted that the team had taken the decision to soft close the fund. At the time, the team consisted of two fund managers, two economists and no fewer than 6 sector-specific analysts. It’s to be expected that a substantial team would be required.

In general, between 25 and 40 holdings are reckoned to be held at any one time. S&P suggest that a very active approach is taken to management, with a concentration of time and effort on studying the fundamentals of countries, sectors and individual companies.

The fund is awared a AAA rating from S&P. What that means is that the fund is seen to demonstrate the highest measures of quality within its sector. This information is based upon the investment process, although this only tells part of the story.

There is also a view taken on the consistency of performance achieved by the management, with specific consideration given to how such levels of performance compare with other funds that operate with similar objectives.

Reading through the report, it’s clear that S&P have given the fund something of a “thumbs up”, but it’s clearly for each of us to observe and to research, prior to making investment decisions.

When you carry out your own research, you may regard such analysts’ reports as being part of the wider package of information that’s made available to you. They may be informative, or you may feel that they are simply to be ignored. That choice is very much your own, leaving you to make the right decisions for your own, personal circumstances.

Nevsky Capital

The Nevsky Eastern European Fund continues to focus on a range of investments in companies based in the key states of Eastern Europe.

Martin Taylor Nevsky

So what does the future hold for the fund? That’s clearly something that’s of interest to visitors and that many analysts will be looking to consider. This blog largely focuses on the historic performance of this Nevsky Capital fund, but it’s certainly believed that the factsheet information that is displayed here can also give an insight into the future.

By studying past performance, it’s obviously possible to get an indication of the investments that are made and the approach that the fund managers make to such investments. Is it possible to predict future performance, based on this evidence?

Making such claims would appear to be a step too far. Past performance is exacty that: it relates to the past. It doesn’t necessarily paint a picture of what the future has in store.

Without the benefit of a crystal ball, however, it’s impossible to know what the future may hold for businesses in Russia, the Czech Republic, or elsewhere in Europe. When investing in a fund, we are all essentially relying on the knowledge of the fund managers to get us the results that we require.

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January 2012 – Eastern European Fund Report

December 2011 represented a difficult month for the region as a whole. In part, this reflected some negative sentiment surrounding emerging markets, but it was also clear that some specifics related to the region.

The fund saw a fall in value of 9.5% over the course of the month. Although this did not compare favourably with the peer group average (which saw a decline of 9.2%), the fund did out-perform that peer group average by 7.9% when looking at the entire year.

The worst performing market was Russia, where political uncertainty contributed to a decrease of more than 10%. Putin’s political party (United Russia) was seen to have a poor election result, which was also followed by a number of domestic protests.

To a certain extent, these protests appear to have shocked the Russian authorities and political establishment. Although the situation now seems to be under control, it’s clear that there is scope for more uncertainty in the coming months.

Nevsky Capital reacted by reducing the Russian weighting during the month. The total fund allocation in Russia is now at 60.6%, with more than 10% of the fund being held in cash.

There were also problems in Hungary, where the government has come under increasing criticism in recent months. The Hungarian market saw a loss of more than 10%. The Nevsky fund managers (Martin Taylor and Nick Barnes) point to the fact that some Hungarian stocks may be undervalued. They feel, however, that they would like to see a more conciliatory tone from Orban, the Prime Minister of Hungary.

At this point in time, it can be seen that the fund is holding a significant proportion in cash. This is likely to continue, until there is clarity regarding the Euro Zone and the existing political situations, particularly in Russia and Hungary.