Showing posts with label Russian market. Show all posts
Showing posts with label Russian market. Show all posts

Thursday, May 21, 2009

Economics 21/05/2009: Moscow's Greening Pastures?

Russian stock markets are enjoying some recovery - in line with the US and firmer oil prices. Since January, MSCI EM - a broader index of emerging markets shares - rose roughly 25%, while MSCI Russia appreciated 30%. Domestic RTS index was up 48% and MMVB +62%, implying that Russia is now in the top three most profitable markets. JP Morgan note reflected this by lifting their assessment of the Russian market from 'Negative' to 'Neutral'. This, of course, is a lagging indicator, catching up with the rally enjoyed to date.

Although oil prices are much firmer now at $62.04 last night (July delivery) - the highest level since November 10, 2008, the latest price increase was driven by lower inventories, not by rising fundamentals or falling output. Demand for Russian oil and gas remains weak and production and exploration costs are not necessarily falling. If anything, in the long run, these costs are going to rise as new discoveries are being pushed deeper and deeper into Eastern Siberian domain, characterized by much more complex geology and smaller fields.

Likewise, industrial production continues to contract: -16.9% in April 2009 y-o-y, more than double on -8.1% fall in March. Overall Q1 GDP fell 9.2% in y-o-y terms, but there is no deflation in the economy (inflation moderated to around 10% annualized rate). Ruble devaluation expectations fell, but many experts still see some room for the currency to fall in months ahead. At the retail level, even with a span of the last two days Ruble rose from ca 43.30-43.35Rb/Euro to 43.00-43.10Rb/Euro, but majority of the businesses I spoke to expect the retail rates to test 44.00-46.00Rb/Euro before year-end.

JP Morgan note gave some support to the theory that Russian Government response to the crisis has been exemplary to date, but what is really interesting from our, Irish, point of view is the continued pressure from Kremlin to restrict corruption in the public sector.

While our own politicians and bureaucrats enjoy very low transparency over the sources of their incomes, Russian President has signed into law a decree requiring all top Government, political and public sector employees, politicians and even the top management of the public enterprises (commercial and non-commercial) to declare all sources of their own and their family members' income, covering:
  • combined annual income from all sources;
  • all property holdings (including the size of each building, land parcels and the country where the property is located);
  • all cars and other transport owned.
This information will be published on the web and will be accessible to public. Confidential information will also include:
  • addresses of property held; and
  • banking accounts.
These declarations will be subject to audit and false declaration of income will be punishable by immedeiate dismissal from the job and can lead to a criminal conviction.

And in contrast with the Irish Government, Russians are pumping state cash into SMEs - on Tuesday, Russian Government announced a 3-year $23bn fund for SMEs with a new target to increase SMEs employment levels from 14% of the total private sector employment today to 33% in 2012. Funds will be used to improve SMEs access to credit, reduce the cost of credit to the SMEs, some direct subsidies, increasing the share of state purchasing allocated to SMEs and reducing the 'red tape'.

Monday, April 13, 2009

Daily Economics 14/04/09

University Quality & Earnings: this week's paper "University Quality and Graduate Wages in the UK" (IZA Discussion paper 4043, available here) estimates the relationship between the quality of UK universities and earnings of their graduates. From the abstract: "We examine the links between various measures of university quality and graduate earnings in the United Kingdom. We explore the implications of using different measures of quality and combining them into an aggregate measure. Our findings suggest a positive return to university quality with an average earnings differential of about 6 percent for a one standard deviation rise in university quality. However, the relationship between university quality and wages is highly non-linear, with a much higher return at the top of the distribution. There is some indication that returns may be increasing over time."

Of course, these findings present a much expected dilemma for Irish education system. Over proliferation of degrees-issuing organizations: from ITs to various private colleges and state support for increasing the quantity of graduates and post-graduates produced by our education system have done nothing to improve the quality of degrees in Ireland. With only 3 universities making it into top 1,000 world rankings, Ireland is hardly in the league of top performance by the quality of our research or post-graduate supervision. With less than 1/2 of the top professorial staff actually teaching students, we are not in the top league of teaching either. What have we been paying for over the last 15 years when it comes to the third level education?


Good & Bad Volatility:
Before news, a quick note for those of you who are interested in academic finance. Per materials I have covered in my recent MSc course on Investment Theory, here is an interesting study of volatility designed to deal with the issue of skewness. The author argues that asymmetric nature of distribution of conditional returns (skewness) is predicated on the existence of two different dynamic processes underlying volatility of returns. In other words, the author tests whether positive returns volatility and negative returns volatility are driven by different dynamic processes. Good read.

Here is another interesting paper, from different field: "Do More Friends Mean Better Grades?: Student Popularity and Academic Achievement" from RAND looks at 'peer interactions' (socializing) role in student academic achievement. The results indicate that, controlling for endogenous friendship formation results in a negative short term effect of social capital accumulation. In other words, social interactions crowd out activities that improve academic performance. Who would have thought that hanging out at frat parties, attending football matches and going out boozing were supposed to be good for academic achievement in the first place, you might ask? The paper has tons of references to the studies that actually claimed this to be the case...


Thin newsfront today due to Easter break, but the US markets have started another week of the ongoing prolonged (some would say overextended and overbought) rally with a small correction. Despite ending trading in the negative, the markets held firm above 8,000 mark - psychology in action. So it's a 'green shoots' theme for now.

Goldman Sachs reported some good results on higher earnings and revenue and announced commencement of a $5bn common shares issue. GS has been a relative out-performer for the sector since the beginning of the crisis. GS said net earnings to March 31 were $1.8bn ($3.39 a share), compared to $1.5bn ($3.23 a share) in the same period a year earlier. This beats (by 2:1 margin) the analysts forecasts. Analysts expected earnings of $1.64 a share, according to Thomson Reuters data. Revenue net of interest expense rose to $9.4bn from $8.3bn. It is hard to estimate how much of this increase came from lower interest rates and access to preferential (TARP etc) lending. GS said that it intends to use proceeds of the $5bn shares issue to help redeem "all of the TARP capital." Good news indeed.

Wells Fargo & GS however are not enough to convince me that we are in a bounce off the bottom. Rather, it looks to me like a cyclical bear rally is upon us, driven by the simple shift of liquidity out of fixed income, commodities and cash and into equities. Thus, the volumes are starting to fall and it is worth tracing this dynamic:
most importantly, see the volumes. Needless to say - once the support folds, liquidity will outflow from equities and the new rally momentum will move onto commodities (assuming the 'green shoots' are still green) or to fixed income (should corporate reporting season turns out nastier than we expect).

And this view is pretty much coincident with the macro outlook predicted by Lary Summers (here): "I think the sense of a ball falling off the table -- which is what the economy has felt like since the middle of last fall -- I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of freefall," said Summers, director of the White House National Economic Council. The recovery is likely to be slowed by "substantial downdrafts" in the economy. "Economies don't go from losing 600,000 jobs a month to a terribly happy path overnight."


Russian markets rally and this means inflation is just around the corner... Yes, I do mean Inflation West of Oder, not in Russia. How? Russian stocks advanced to a five-month high last week, driven by investors taking inflation hedge against oil price increases. RTS index closed up 6.6% at 810.90, breaching 800 mark for the first time in almost 5 months. Ruble-denominated index Micex also rallied. The latest rally brings overall annual gains to 28% since January 2009, beating by 16 percentage points global MSCI emerging markets index. Two big gainers were: state-controlled OAO Sberbank +12% on the strengthening of global finance shares and the largest independent oil producer OAO Lukoil +6.7% on the back of price of oil consolidating above $50pb.

French Leafs of Green? I am less swayed by the claims that the French economy is starting to show signs of stabilization (see the story here). Why? All the data underlying the claim is related to industrial activities that experienced significant - extraordinarily deep - contractions in recent months. A technical bounce is long overdue and signals nothing in terms of bottoming-out. In addition, French data usually is less volatile than that of the US, simply due to significant persistence around the trend. This means shorter falls and smaller rises, shallower recessions that are more prolonged. Timing-wise, I would not anticipate France to come out of the slump before Germany and Germany will lag the US. The former conjecture is simply based on the lack of investment capacity in France internally and the lags in investment inflows into France relative to the US and BRICS. The latter conjecture is based on the nature of two economies - US growth will restart once US consumers de-leverage (a process that is underway for some time now), German economy will restart when foreigners start buying luxury durable goods. This, in turn, cannot take place before the US consumers recover their demand for smaller consumption items...

Daily dose of fun...
Courtesy of www.TheDailyStuff.ie is the following test for budding photo journalists out there: You are on an assignment to photograph flood-striken Dublin.
You shoot Sandymount and waves spilling onto the strand. Liffey waters raging to the bay.
You see a man swept by the current, rushed out to the sea ahead. You suddenly realize who it is... It's Brian Cowen! You notice that the raging waters are about to take him under. You think to yourself, you can save the life of Brian, or you can get a Pulitzer Prize winning photo.

QUESTION
and please give an honest answer: Would you select
(A) a high contrast colour shot

or (2) a classic black & white?


More to come later...