oil crisis ahead

• A month ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt’s ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across north Africa and the Middle East. And oil has surged above $115. Little wonder. The region of Egypt provides 35% of the world’s oil. Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m barrels a day (b/d).
• So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil firms operating in Libya would cut production and that the country’s ports had temporarily closed. As Adam Sieminski at Deutsche Bank points out, oil prices are driven both by current conditions and by future expectations.
• Oil markets don’t like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world’s oil) had added 20% to oil prices by the middle of this week. The big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.
• Oil is more global than it was during those previous crises. In the 1970s production was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil has hit markets from fields in Latin America, west Africa and beyond. Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009; OPEC’s share of production has gone from around 51% in the mid-1970s to just over 40% now.
• Yet the globalisation of oil supply has not diminished OPEC’s clout as the marginal supplier of crude. Markets are tight at the moment. Bumper inventories, built up during the downturn, are running down as the rich world recovers and Asia puts on a remarkable growth spurt. Demand rose by a blistering 2.7m b/d last year, according to the International Energy Agency, and is set to grow by another 1.7m b/d this year by Deutsche Bank’s reckoning. Many other producers are already running at full capacity; OPEC has its hands on the only spare oil.
• If Libya’s oil stopped flowing importers would look to Saudi Arabia to make up the shortfall. The oil could probably flow to fill the gap in Europe, Libya’s main market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but that looks wishful. Analysts think the true number is nearer 4m-5m b/d, with 3m-3.5m b/d in Saudi hands. That is ample to plug a Libyan gap but would hasten the day when growing world demand sucks up all spare production capacity. Analysts at Nomura reckon that it would only take a halt of exports from Algeria as well to absorb all the slack and propel oil to a terrifying $220 a barrel.
• Despite saying it stands ready to produce more oil, Saudi Arabia has so far been reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with oil and seems content with a price around $100 a barrel. Traders hope that Saudi Arabia will boost production stealthily or that OPEC will call a special meeting to raise quotas and calm markets.
• The worst-case scenario for oil prices would be some kind of disruption to Saudi supply itself. That concern has become livelier given the unrest in neighbouring Bahrain. The tiny island kingdom produces little oil but is of vital strategic importance in the Persian Gulf, a seaway that carries 18% of the world’s oil. America’s 5th Fleet uses the country as a base.
• The Saudis may also fear that protests by Bahrain’s Shia population could spill over their own borders. Saudi Arabia’s eastern provinces are home to both its oil industry and most of its Shias, who may also have cause for grievance with their Sunni rulers. The king this week announced $36 billion in benefits for his people. One crumb of comfort is that oil facilities across the region are generally located far from the population centres, where protests tend to be concentrated, and are well defended against anything but a concerted military assault.
• What might be the effects of a more general supply crisis in the Middle East and north Africa? The oil shocks of the 1970s spurred the world to build stockpiles, such as the 727m barrels of crude oil in America’s strategic petroleum reserve, to be drawn on in the event of upheaval in the Middle East and elsewhere. China is building up a strategic reserve of its own. America’s Energy Information Administration puts total rich-world stocks in the hands of governments and industry at 4.3 billion barrels, equivalent to nearly 50 days of global consumption at current rates.
• The impact of a crisis would therefore depend on how much oil production was lost and for how long. Even seismic shocks in oil-producing countries might not cut off supplies for very long. Yet the example of Iran shows what can go wrong. Leo Drollas of the Centre for Global Energy Studies, a think-tank, points out that pre-revolutionary Iran pumped 6m b/d. The new regime ditched Western oil experts and capital, and it has never come close to matching that level of output since; it now produces just 3.7m b/d. Middle Eastern oil is largely state-controlled but, as Amrita Sen of Barclays Capital observes, foreign investment remains vital to north Africa’s oil industry. If new regimes emerged that were more hostile to outsiders, that might have a lasting effect on production.
• The world could probably weather a short-lived crisis. But the damage if oil prices spiked and stayed high for a long time could be severe for the recovering economies of the rich world. As for the prospects of reducing the importance of the Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean that OPEC’s share of oil production rises again as it pumps extra output eastward. A troubled region’s capacity to cause trouble will not diminish.

brazil,absolutely the most attractive emerging market right now

• The scene at the BM&FBOVESPA, Brazil’s main stockmarket, earlier this month encapsulated Brazil’s thriving alternative-investment industry. A champagne-sipping crowd milled around José Carlos Reis de Magalhães, the boss of Tarpon, a local private-equity firm, on the floor of Brazil’s slick, renovated exchange. They were toasting the successful initial public offering (IPO) of Arezzo, Brazil’s largest shoe retailer. Tarpon had bought a 25% stake in Arezzo for 76m reais ($43.8m) in 2007 and seen its investment nearly quintuple in value in three years. Tarpon’s own share price is up by 143% from a year ago. The firm counts big endowments, like Stanford University, among the investors in its $3.5 billion fund.
• Tarpon is not the only part of Brazil’s private-equity and hedge-fund industry to have attracted international attention. In September Blackstone, a private-equity giant, paid $200m to take a 40% stake in Pátria Investimentos, a local private-equity firm. In October JPMorgan Chase’s Highbridge hedge fund, the world’s largest, bought a majority stake in Gávea Investimentos, a $6 billion Brazilian fund. Brazil is “absolutely the most attractive emerging market right now,” says the boss of a big American private-equity firm. Other economies may be bigger but investments there are seen as politically riskier. The Brazilian government is less hostile in its attitudes toward private, and foreign, investment.
• Sceptics recall the last time people declared a golden age for private-equity investment in Brazil. Foreign firms and banks flocked there in the 1990s. When shocks from the Asian crisis pulsed through the country, and Brazil devalued the currency in 1999, plenty flocked out again. Some local firms survived the bloodshed: GP Investments, Brazil’s largest private-equity firm, is still going strong, as are a handful of others from that era. But most global firms left and didn’t come back until 2006, when investment activity started to rev up again.
• Brazil is returning to a bigger, more resilient economy. OECD countries saw their GDP decline by 2.7% over the course of 2008 and 2009; Brazilian GDP grew by 4.9% during that time, and by a further 7.5% last year. It is now the world’s eighth-largest economy and could overtake Britain, France and Italy to become the fifth-largest by the end of this decade. The commodities boom is one source of growth: Brazil is the largest exporter of sugar, coffee and meat, and second only to America in soyabeans. Consumer spending is vibrant. The country is the world’s second-largest market for cosmetics and the third-largest for mobile phones. Its hosting of the 2014 FIFA World Cup and 2016 Olympics will require at least $50 billion in infrastructure investments, many of them privately funded.
• Money is pouring in, as investors throng funds’ offices on bustling avenues like Faria Lima in São Paulo and Paiva de Ataulfo in Rio. Local hedge funds managed around $243 billion in assets at the end of 2010, up by 23% from 2009, according to the Brazilian Financial and Capital Markets Association, an industry group (see chart 1). Private-equity firms oversee $36 billion.
• There are several reasons for this explosive growth. One is the maturing of the country’s capital markets. Laws protecting minority shareholders’ rights, for example, have fostered confidence. Brazil’s exchange is now the fourth-largest in the world by market value. That is a boon for hedge funds, which need liquid instruments to trade, and for private-equity firms, which use IPOs to cash out their investments.
• Investors are freer to choose where to put their money, too. Brazil’s 400 or so pension funds, with assets of around $342 billion, have been allowed to place money more freely with alternative-investment firms since 2009. Pensions now account for around 22% of investments in private equity and venture capital, according to Claudio Furtado of Fundação Getulio Vargas, a university. Valia, the $6.8 billion pension fund of Vale, a miner, has increased its allocation to private equity from 1% of assets three years ago to 6% in 2011.
• The Brazilian government’s sunny view of hedge funds and private-equity firms also helps explain their growth over the past few years. In many countries governments treat private-equity firms and hedge funds with either loathing or teeth-grinding tolerance. Partly because bank loans are very short-term, the tone from Brazilian officials is different. “As a country and an economy, we need private equity and venture capitalists to invest and to help our entrepreneurs,” says Maria Helena Santana, who runs the CVM, Brazil’s equivalent of America’s Securities and Exchange Commission (SEC).

• When Brazil’s government raised the tax on foreign investment in fixed-income instruments last year from 2% to 6%, private-equity firms complained. The government promptly changed it back—but only for them. BNDES, Brazil’s development bank, has put $1.1 billion into private-equity funds, and is the industry’s top investor. Private equity accounted for a higher proportion of GDP in 2010 than in most other emerging markets (see chart 2).

• Another reason for the rise in alternatives is a decline in interest rates. The benchmark Selic rate stands at 11.25%, much lower than the 26.5% it was set at in 2003. The threat of rising inflation may have reversed that trend in the short term but rates are expected to keep falling in the long run. Brazilian investors can no longer reap extraordinary returns just from parking their money in risk-free bonds. Maurício Wanderley of Valia says he looks for returns of 25-30% on his private-equity investments, and so far they’ve been “above our expectations”. Brazilian hedge funds have posted annualised gains of 17% over the past three years, according to EurekaHedge, a research firm. (North American funds have managed 8.6% on an annualised basis in that time.)
• The buzz around Brazil will put those returns under pressure, however. Alvaro Gonçalves of Stratus, a Brazilian private-equity firm, appears dismayed at the speed with which “armies” of global investment firms are arriving. Rather than fly in for visits, they now want to set up offices and hire local deal-makers. The competition is causing salaries to rise. Jon Toscano of Trivèlla Investimentos, a private-equity firm, estimates that executive salaries have nearly tripled in as many years.
• Greater competition has less effect on the hedge-fund industry, since there are many trading opportunities. But for private-equity firms, where the number of deal opportunities is smaller, there are huge consequences. Prices for deals have already gone up in the past year—although most investors say that companies are still not as expensive as they are in China or India, where there is even more competition.
• The three largest private-equity deals in Brazil’s history took place in 2010, all of them carried out by foreign firms. Stakes in consumer-related companies are particularly prized. Carlyle Group, an American buy-out firm, did three deals in 2010, involving a lingerie company, a travel firm and a health-care company—all of them bets on Brazil’s middle class. Many local firms are ramping up their efforts to look for deals beyond São Paulo and Rio, where most of the foreign firms are based.
• Ballooning deal prices may also drive crafty local firms to invest more money abroad. 3G Capital bought Burger King, an American fast-food chain, for $4 billion last year because the management felt Brazil had become too expensive and that global firms were too busy chasing deals in emerging markets to notice the opportunities at home. “You can do a buy-out in the United States of a global brand, a well-known company, and really face no competition,” says Alexandre Behring of 3G.

• Back in Brazil, some worry that the new entrants’ preference for big leveraged buy-outs (LBOs) could damage the industry’s unusually wholesome reputation. In Brazil private-equity deals are mostly unleveraged, and often involve minority positions in medium-sized companies. That’s partly because high interest rates make debt crushingly expensive—the average rate for a commercial business loan is 29%. But even if credit becomes more readily available, Brazilian firms are nervous of it. Brazilian managers reel off the names of highly leveraged buy-outs that have tanked in the West. “I hope we can avoid the image that we are raiders and vultures,” says Mr Gonçalves. “This is the profile that these large LBO firms left in markets, and we don’t want them to do that here.”
• It is more likely that the foreigners will have to adapt to Brazil than the other way round. Unlike China and India but like many other emerging markets, Brazil has only a limited number of large firms to invest in. Private-equity investors won’t be able to swim in a sea of $500m and $1 billion deals. Given the scarcity of long-term financing, some are looking to lend instead. “A large part of our plan is to provide credit and growth-equity capital” in Brazil, says Glenn Dubin, the boss of Highbridge.
• Although Brazil’s equity markets are liquid, concentration remains a problem for hedge funds. Eight companies account for more than 50% of the market value of the BM&FBOVESPA. Shorting the shares of smaller firms is expensive because it is hard to find shares to borrow. Larger funds have to be patient when building up positions. Luis Stuhlberger of Credit Suisse Hedging-Griffo, Brazil’s largest hedge fund, says it is like being “an elephant in a bathroom. You have to move very slowly, otherwise you break everything.”
• Funds must also comply with strict requirements for transparency and liquidity. Brazilian hedge funds must report their net asset values daily and their positions on a monthly basis. These are then posted publicly on the website of the CVM for anyone to see. Thanks to the country’s long experience of volatility and inflation, most investors do not agree to long lockup periods for their money. As a result, many funds offer daily liquidity, which means they do not have much flexibility with their strategies and cannot take illiquid positions.
• Some managers complain that Brazil’s regulatory system costs them their edge, because others know what they are up to. But most don’t seem to mind too much. Transparency brings legitimacy to the industry and calms investors, many say. Frauds like Bernie Madoff’s, which have dented investor confidence in hedge funds in America and Europe, are less likely to go unnoticed in Brazil. “Madoff would never happen in Brazil,” says Eduardo Lopes of Ashmore, an emerging-markets fund.
• Indeed, other markets are moving closer to a Brazilian-style system of regulating alternative investments. Hedge funds and private-equity firms have been mostly unregulated in America and Europe, but that is set to change. Later this year, America will start to require funds to register with the SEC and disclose some of their holdings to regulators. In France hedge funds now have to report their short positions; it is possible that other countries in Europe will enact similar requirements. “The financial crisis showed that many of the choices we made before are good choices,” says Ms Santana of the CVM.
• There are still plenty of risks in emerging markets, of course. Inflation remains a worry, and Brazil’s battle to keep down the value of the real has led to other capital controls on top of the tax on foreign investment. The BOVESPA index has declined by 6% in the past month. But here too, Brazilian alternative-investment managers claim an edge because they have been through rocky markets many times before. “They’ve basically taken as much chemotherapy as you can take and survived it,” says a foreign fund manager.
• Many managers in China and other emerging markets are familiar only with good times, so some investors worry that they might not perform well if the economy stumbled. Arminio Fraga, a former central-bank governor who founded Gávea, thinks the volatile global economic environment will play to Brazilian managers’ strengths in the coming years: “There are a lot of things out there that look familiar to us, given Brazil’s history.”

inside china

• China has not seen a surge in “ hot money”  ( Money that flows regularly between financial markets as investors attempt to ensure they get the highest short-term interest rates possible. Hot money will flow from low interest rate yielding countries into higher interest rates countries by investors looking to make the highest return. These financial transfers could affect the exchange rate if the sum is high enough and can therefore impact the balance of payments),
  coming into the country, the country’s foreign exchange regulator said on Thursday, despite the loose monetary policy in the US that Beijing has sometimes blamed for causing destablising capital inflows.
  
• A net $35.5bn of hot money, illegal speculative capital, entered the country last year, which was “ant-like” in comparison to the size of the economy, the   State Administration of Foreign Exchange said.
• The massive build-up in China’s foreign exchange reserves over the last five years, which are now by far the world’s largest at $2,850bn, has encouraged many analysts to speculate that large flows of overseas money were evading the country’s strict capital controls and finding their way into the local property and stock markets.
• As a result, a detailed research conducted to try and calculate the real level of hot money and found that it was relatively limited. “We have not found evidence of any large-scale capital inflows co-ordinated by any established financial institution,” the regulator said.
• On average over the last decade, hot money inflows were $28.9bn a year, equivalent to around 9 per cent of the increase in the country’s foreign exchange reserves. This compares to an economy now with nominal GDP of around $5,700bn and where new loans created last year reached Rmb 8,000bn.
• “The argument that cross-border capital flows are driving domestic stock market performance lacks evidence in the data,” said in a report.
• Given that Safe is the body charged with policing the country’s capital controls, it has a vested interest in showing that they are not being easily evaded by investors.
• However, the figures from the regulator will make it harder for Beijing to suggest that the  inflationary pressures in the chinese economy are the result of the build-up in liquidity in the international financial system caused by the US Federal Reserve policy of quantitative easing.
• In the run-up to the G20 summit in South Korea last November, when it looked that China might come under attack for artificially depressing the value of the renminbi, Beijing joined several other governments in accusing the US Fed of causing huge capital flows and inflation in the developing world.
• Zhu Guangyao, a deputy finance minister, said that the Fed “did not think about the impact of excessive liquidity on emerging markets by having launched a second round of quantitative easing at this time”.
• “If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing,” said deputy foreign minister Cui Tiankai, when asked about US proposals to limit current account surpluses.
• Inflation in China increased to 4.9 per cent last month, which was not as large a rise as had been expected, but was still well over the 4 per cent target the government has set for this year. While some economists believe the current bout of inflation is the result of short-term problems in food production, some others believe it has been caused by the huge expansion in credit that the Chinese authorities have engineered over the last two years to help the economy ride out the global financial crisis.



euro-zone’s sovereign-debt crisis still on

• Ever  since the sovereign-debt crisis erupted a year ago bond markets have repeatedly tested the resolve of European leaders to avoid government defaults. On each occasion euro-zone members have done something—but not quite enough to quell the crisis. This year looks like following the same pattern.
• In early January investors sold off bonds issued by vulnerable euro-zone countries like Portugal, on the region’s periphery, and Belgium, closer to the core. In response Germany, the euro area’s reluctant paymaster, put its weight behind another initiative. A “grand bargain”, which is due to be struck at a summit in March, is supposed to bolster the support available for rescues. In return the euro zone will embrace more Germanic discipline.
• Hopes had been rising that the grand bargain would live up to its name. Spreads of Portuguese and Spanish ten-year government bonds over German benchmark bonds dropped appreciably from their spikes in January. But an inconclusive meeting of European leaders on February 4th has darkened the mood again.
• The one concrete reform that looks likely is an increase in the effective size of the rescue funds available to struggling euro-zone states. When these were first unveiled last May, they were said to total €750 billion ($1 trillion), of which the biggest component was €440 billion from a new entity, the European Financial Stability Facility (EFSF), whose borrowing is backed by guarantees from euro-area members. The rest would come from the European Union and the IMF.
• But once the EFSF was set up it became clear that its effective lending capacity was only around €250 billion. The shortfall arises mainly because only six of the euro-area states have a AAA credit rating. This means that the facility has to retain big cash reserves in order to achieve the same rating for itself. The EFSF raised €5 billion in the markets in late January to fund loans to Ireland, for instance, but of this only €3.6 billion has found its way to the Irish. The March summit will almost certainly increase the bail-out facility to match the original promise of €440 billion. This could be done by raising the guarantees that back the facility and getting less creditworthy states to pay in capital.
• The trouble is that investors increasingly fear the original bail-out sum of €750 billion will not be enough to douse the fire should it spread from smaller peripheral countries to larger ones like Spain. These fears were fuelled by Ireland’s bail-out late last year, which was sparked by the rising cost of recapitalising a bust banking system. Analysts worry that more banking bills may surface elsewhere, straining rescue funds. Willem Buiter, chief economist at Citigroup, has argued that up to €2 trillion of liquidity support may be needed.
• Another disappointment of the February 4th summit was the perception that European leaders seem to be backtracking on plans to enhance the clout of the EFSF. Until now the European Central Bank (ECB) has reluctantly shouldered the job of intervening in markets by buying the bonds of troubled countries. But the summit communiqué did not include the expected diplomatic codeword (“flexibility”) for enabling the EFSF to do more. A less supple EFSF will be less effective. It may also heighten tensions within the ECB: rumours flew this week that Axel Weber, head of the Bundesbank and a critic of the ECB’s foray into bond-buying, no longer wants to be a candidate to succeed Jean-Claude Trichet as its president.
• Speculation that the EFSF could facilitate a reduction in the debt of countries like Greece through buy-backs has also faded. Under such a scheme the facility would lend funds to the Greek government, which would then purchase its own debt at supposedly bargain-basement prices. Since these transactions would be voluntary there would be no default and they would be a cheap way of reducing the nominal value of the debt. It is not clear how well the idea would work in practice. Without a big discount to bonds’ par value, buy-backs may have only a limited effect on countries’ debt burdens. And using scarce EFSF resources for this purpose would reduce the ammunition for dealing with another emergency.
• Rather than deal with these tricky issues, European leaders concentrated at the summit on the other side of their grand bargain, the reforms Germany wants to prevent future crises. Under a “competitiveness pact”, weaker countries will have to overhaul their economies so that they can cope with the rigours of being in the single currency. That will involve reforms in sensitive areas such as retirement ages, corporate tax and wage-indexation. Germany is also keen for countries to forswear budgetary profligacy (for example, by putting “debt brakes” into their constitutions).
• Some of these ideas make sense, others less so. Delinking wages from prices would be a good idea. But aligning corporate-tax rates at a high level would make the euro area as a whole less attractive for foreign investors as well as clobbering countries like Ireland that have especially low rates. It is hard to avoid the impression that the desire to remould the euro area in Germany’s image is designed above all to mollify German voters.
• The bigger flaw in the plan is that it seeks to muddle through the sovereign-debt crisis rather than get on top of it. The unpalatable truth is that government debt in Greece, and probably in Ireland and Portugal too, will have to be restructured. European leaders may yet pull a rabbit out of the hat. But this month’s meeting has many worrying that next month’s reform package will be woefully inadequate.

massive blow to investors at dalal street, sensex losing 440 points

• Indian shares declined for the fourth week in five, shedding 2.4 percent in choppy trade on Friday, as worries of continued high global oil prices worsening the domestic inflationary pressures hit investor sentiment.
• Foreign institutional investors (FII) pulled out $1.5 billion from Indian shares this year until Feb. 2, with high inflation and rising violence in Egypt hastening withdrawals as risk aversion grips global investors.
• Energy major Reliance Industries , with the heaviest weightage in the main index, led losses, dropping 2.5 percent on concerns it may get sucked into a bidding war for a U.S. asset. Software and financial stocks were also among major losers.
• Oil was headed for a second straight week of gains as Egypt’s volatile situation kept markets on edge, while investors awaited U.S. employment data expected to give direction to prices later in the day.
• Rising prices of food and other commodities are expected to trigger more monetary tightening by India’s central bank, which has raised interest rates seven times since mid-March last year.
• Data on Thursday showed India’s food price index rose 17.05 percent and the fuel price index climbed 11.61 percent in the year to Jan. 22.
• None of the sectoral indices stood in the positive terrain in trade today. However, BSE Realty index (-3.37%) and BSE FMCG index (-3.08%) were the biggest losers, while BSE CD index (-1.2%), BSE Healthcare index (-1.4%) and BSE Metal index (-1.78%) were the ones with minimum losses.
• India’s oil secretary may meet Cairn Group and Vedanta Resources on Sunday, ministry and company sources said, to try to hammer out royalty payment issues that threaten the multi-billion dollar takeover of Cairn India.
• OPEC’s newly announced plans to spend billions of dollars on future supplies are unlikely to unleash a flood of oil on to the market as it maintains a policy of restraint and supporting prices for years to come.
• A government-backed probe into a scandal in the granting of telecoms licences in India has found many lapses, the telecoms minister said on Friday, citing irregularities dating back to when the opposition was in power.
• Indian Oil Corp is interested in building a $5 billion refinery in Turkey and is currently carrying out feasibility work on the project, Junior Trade Minister Jyotiraditya Scindia said on Friday.
• State-run Hindustan Copper’s follow-on offer is unlikely to hit the market in the current fiscal year-ending March, its chairman and managing director Shakeel Ahmed told Reuters on Friday.
• The world is going into a period of food volatility and supply disruptions due in part to weather related problems and a backdrop of rising prices, the U.N. World Food Programme’s (WFP) executive director said on Thursday.
• State Bank of India has so far not got the go-ahead from government authorities to deal with Hamburg-based European Iranian Handelsbank (EIH) to settle oil imports payment, sources at the Indian bank said.
• Mozambique has awarded India’s Jindal Steel & Power a 25-year licence to explore and mine for coal in the northwest Tete province, in return for a $180 million investment, the country’s resources ministry said on Friday.
• Speciality gas maker BOC India said on Friday a proposal by its founder to delist its shares from Indian bourses failed as the number of shares tendered by shareholders were less than the minium number of shares required to complete the offer.