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.

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.

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.