Over the last few months, investors have been listening to stories about how great are trade negotiations between the U.S. and China. Finally in May, reality brutally verified politician’s fairy tales.
Q1 hedge fund letters, conference, scoops etc
It all has started when Donald Trump posted tweets in which he informed, among others, about increasing tarrifs on Chinese products worth 200 billion dollars from 10% to 25%. This hike was previously postponed, and majority of investors believed that it would never be imposed.
In the following days, firstly stock market dropped significantly, and then gradually started to rise. Ultimately, over two weeks, Shanghai Stock Exchange lost about 7%, while the S&P 500 index in the U.S. fell by 3%.
Calmer recent days do not mean that relationship between the U.S. and China has normalized. Both sides have already announced further tariff increases.
In turn, on Sunday, world was shocked by information that Google broke cooperation with Chinese company, Huawei. Current users of Asian hardware conglomerate will not be much affected by this change – they will be cut off from Android updates, but still will have access to Google products like Gmail and YouTube. However, this access will not be available to new Huawei users.
It seems that, this is one of the first situations when not only financial markets observers (or worlds of politics) will be interested in the trade war.
When it comes to the stock market outlook, whole turmoil has been strongly reflected in China and other EM countries than in the United States. Remember, however, that we have seen a similar situation last year. Then, in September, we’ve sent an email to our clients where we’ve informed them that: “either rest of the world will begin to make up for losses, or the U.S. will experience a stock exchange shock”. Month after that U.S. market have experienced sharp drops.
Currently, our expectations are similar. Economic slowdown in emerging markets should also affect the United States.
Americans warn against conflict in Persian Gulf
Tensions between the United States and Iran are gaining momentum. Over the recent days Americans have made several significant moves:
- they transferred part of their forces to the Persian Gulf region including USS Abraham Lincoln aircraft and B-52 bombers;
- they ordered their staff to withdraw from Iraq,
- they informed airlines about a danger of flying near the Persian Gulf region.
Media is mainly dominated by bold statements of politicians from both sides. Looking at the American side, it is not hard to get an impression that President Trump does not want to initiate war with Iran, but his advisors do – we mean John Bolton and Mike Pompeo.
We have mentioned about their determination to initiate a war with Iran in July 2018:
“It is worth to add that over the last months, two important positions in the Trump administration were taken by John Bolton and Mike Pompeo. Both are known as hot supporters of government change in Tehran.”
Recall that relationship deterioration between the U.S. and Iran began with U.S. withdrawing from so-called nuclear deal (Joint Comprehensive Plan of Action), that was forbidding government in Teheran to continue work on nuclear weapons. United States made that decision despite the fact that Iran has not breach it! Then Americans decided to cut off Iran from selling oil (proceeds from selling this commodity are crucial for Iranian economy).
Remember that Iran is treated in the Middle East as a local power and a natural enemy of Israel. In turn, Israel has powerful influence on the U.S. foreign policy.
What was the reason of this relationship deterioration between the U.S. and Iran at the beginning of May? There may be few, but our attention was drawn by Syrian theme. Well, the U.S. authorities are constantly striving to weaken Syrian leader. To destabilize situation in the country, United States prevents other countries from selling oil to the Syrians (at this point, operation against Venezuela described by us HERE a few days ago comes to mind).
Difficulties in buying oil led Syria to a very difficult situation. At the end of April, oil production in this country was only 24,000 barrels per day (they need at least 136,000 barrels per day). It have to be added, that before the war Syria was energetically independent. Destructions made during the war have limited oil production in this country.
In turn, at the beginning of May, information about Iran’s delivery of 1,000,000 barrels of oil to Syria appeared. This transport led to temporary improvement of the situation in the country ruled by Bashar Al-Assad.
Perhaps this was the reason – Iran’s decision to supply oil to an independent and oppressed (by the U.S.) country. This action is against current democratic standards, which consist in fact that each country should relinquish its independence and choose the authorities which will listen to Washington’s commands.
New ETF with exposure to uranium market
Few months ago, we wrote that the only ETF giving an exposure to uranium market (ticker: URA) ceased to be a noteworthy asset. Some producers of the commodity have been withdrawn from its portfolio composition, and instead many companies barely associated with this industry have been added, e.g., those involved in reactors construction.
As a result, investors wishing to take advantage of an upcoming rebound in the industry were forced to choose individual companies, which always involves some risk. Especially, if someone has limited budget and can choose only one uranium producer.
Perhaps now, the situation will change for the better. ETF HURA has made debut on the stock exchange, which consists only of uranium producers. Service costs are 0.75% per annum, which is an acceptable amount.
One disadvantage is that the ETF is denominated in Canadian dollar. Therefore, during buying and selling, we bear additional conversion cost.
For now, HURA has been present on the market for several days. We do not intend to sell selected companies we have invested in, but we hope that soon similar ETF will appear on the market which will be denominated in the U.S. dollar.
United Kingdom: Pedestrian punished for avoiding cameras
Special vans appeared on the streets of London. They transport cameras with face recognition systems. The image of every pedestrian is automatically compared to the faces of wanted criminals.
A few days ago, a pedestrian walking in East London, who was brazen enough to cover his face. For his disobedience he has been punished with 90 pounds fine.
So far, we have heard about facial recognition systems mainly in China. It is not surprising, however, that Big Brother is also introduced in real life in Europe. Ultimately, Western societies have undergone solid brainwashing over the last few decades and they have total serfdom in their blood. Therefore, the camera recognition system on big city streets only disturbs a small group of people.
There is only one question: what if all these wanted criminals are going to dress burqa? The UK authorities will have only two options to choose from: admit that they were easily outwitted or forbid to wear burqa. The choice of the second option would cause considerable anger of Muslims who are trying to impose their own standards on some British cities streets.
Case of Gazprom as an evidence of investors’ irrationality
After a long period of time, when Gazprom shares fluctuated in the range of 4 to 5 dollars, suddenly value of the Russian company on the stock exchange increased by more than 20%! Due to this situation we made a following comment:
“So far, Gazprom has been yearly dividend, ranging from 4 to 8%. Despite very attractive valuation (P/E = 4, P/BV = 0,3), company did not attract much investors’ interest. Price of one share usually fluctuated between 4 and 5 dollars. Until May 14, when company announced a significant increase in dividend. Shares immediately jumped by 20%!
Gazprom deservedly met with increased investors’ interest, but the question is: has anything changed over the last days about this company? Let’s get deeper into this.
Dividend is the company’s profit, which is divided among shareholders. Gazprom few days ago announced that it will pay a larger dividend than usual. Still, we are talking about funds that company already had, which was visible in the financial reports and on all available pages showing financial data. The market knew about the good financial condition of the company, but did not react.
As soon as the Russian company announced that it would pay higher dividend, it immediately attracted investors’ attention. On the other hand, Gazprom could use this money, for example, to take over a well-growing company, which could improve its long-term prospects. It seems that, in this case investors will not be able to throw themselves into Gazprom shares.
This example illustrates how irrational are investors’ actions. It should be added that Gazprom will most likely remain an undervalued company. Why? There is a narrative around the financial markets according to which investing in the Russian market is extremely dangerous. In our opinion, very cheap Russian shares are much safer choice than very expensive U.S. shares. This is indicated by both pure calculation and all possible analyzes based on historical data. They show that the low valuation of given stock exchange preview high returns in the following years. Meanwhile, Russia is the cheapest market in the world.”
Article by The Independent Trader
