B stands for British Petroleum

“A stands for Apple, B stands for British Petroleum” is what I imagine kindergartners will say one day when learning their ABC’s and while this image might is quite unrealistic, I somehow do hope that these last few months will be remembered for the future.

Given the fact that I myself do own a car; therefore, oil prices tend to matter to me on a more personal level, thus I’ve been following the story of BP (British Petroleum) and their latest mishaps for quite some time. To begin with, we need to mark that anything that is to be said about this specific company and their performance should not cast any shadow on Great Britain as the company even given their name does not bear a close relationship to the country as it is a Joint Stock Company and by now the amount of shares owned by American investors is approximately as large if not larger as the investment capital from Britain.

The story

While the story of BP and the infamous oil spill surge in the Deepwater Horizon just off the coast of the Gulf of Mexico starts off on 20^th of April with, quite literally, a blast. We should point out that BP does not have the best history when it comes to safety, as previously this year they were charged for disregarding 97% of industry safety regulations for two of their oilrigs.

However, returning to the current situation and the oil leak. It seems quite noteworthy that since the start of the incident the stock price has dropped more than a third and the future of the company did not seem that bright especially by the end of June. This was not helped by the fact that seemingly every attempt of BP to solve the problem came undone by forces of nature, thus what started as a minor mishap became one of the largest ecological disasters that the United States have faced in their history.

Source: Data from New York Stock Exchange

BP also received a lot of negative press mostly because they seemed to underestimate the severity of the leak on several occasions often providing the public with numbers that experts quickly judged to be too optimistic. Furthermore, some BP’s executives received criticism from the US government for playing the “blame game” and being too quick to dismiss their own shortcomings and blaming their co-workers.

As you can see in the graph above these events had severe effect on the share price of BP all throughout the previous months.

The outlook

While it seems that for now the oil leak has been managed and the work on retrieval of the spilled crude oil is almost completely finished. We can observe that share price has begun to recover thus the future prospects of the company have improved although they still need to sell quite a bit of their assets (30 billion dollars worth in the next 18 months).

Unfortunately, the company still faces fines against them for the wrongdoing and the total amount due can be almost quadrupled if gross negligence is proven by investigation in the matters at hand and thus reach 4,300 dollars per barrel (over 21 billion dollars total). Therefore, the future of the company might still be on shaky grounds.

Although the future is still unclear for BP, lets just hope that (borrowing the words from Roosevelt) that these unfortunate events will live on in infamy, and that safety regulations will be enforced more carefully from now on, so that such damage to both environment and shareholders does not recur.

Written by Uģis Rožkalns on behalf of SSE Riga Investment Fund

Double Dip: Myth or Reality?

Now is the middle of second quarter earnings season. According to Bloomberg, out of 54 companies which reported their earnings, only 10 fell short of expected EPS by analysts. Fairly bullish view one might say, but not under current circumstances. In the face of double dip fears investors are switching their minds quickly. Market is searching for weakness in published second quarter data absence of which would be a proof that economy is recovering. Although companies on average have reported that their profits are higher than expected, revenues were below of expectations. Profits in this quarter came mainly from cost cutting. This makes investors worry about corporate profits in the coming quarters. What if consumer spending doesn’t pick up, will corporations be able to generate profit through cost cutting further?

Downtrend since May in S&P 500 index shows that market prices in double dip scenario. But volatility suggests that market doesn’t really know yet how much to price in.

Double dip it seems is a threat mainly to developed countries such as the USA, Japan, UK, France, Germany etc. Firstly, because some of the emerging economies didn’t experience even “first dip”, for instance China, where the lowest point was GDP growth of 6.2%. Secondly, developing countries are recovering much faster. As estimated by IMF in World Economic Outlook Update (July 2010) Brazil will grow 7.1%, while the growth rate for Euro area is projected at 1.1% in 2010.

 Paul Krugman, Nobel-prize winning economist, warns that what we see now in the world’s economy can easily be turned into “Third Depression”: so severe recession that it can be compared with Long Depression of 1874-1879, and Great Depression of 1929-1931. The main mechanism that can threaten economic recovery is inappropriate economic policy. In both Long and Great Depressions slump was not uninterrupted, there were occasional bounces in GDP, which fooled authorities into believing that recession is over. Recent economic growth probably is just such bounce. Krugman argues that recent growth in GDP is mainly driven by “inventory bounce” and fiscal stimulus, factors that don’t promise sustainable recovery. “Inventory bounce” happens when demand has declined and companies are left with excess inventories, they decrease production to get rid of stored goods, when inventory is disposed firms increase their production resulting in a “nice” growth rate.

For example fiscal stimulus in the USA highest impact on growth rate has already shown in the middle of this year and now its effect is disappearing. Governments around the world are reluctant to engage in second stimulus wave instead they are obsessed with austerity measures. Fears of debt problems: Greece-type crisis, motivate governments to start spending less and taxing more in a situation where private consumption growth is still fragile. Is it right or wrong?

There are two sides in the current situation. Some including Jean-Claude Trichet, president of ECB, argues that lower budget deficits will “restore confidence” in the economy thus fostering recovery. Others, for example Paul Krugman, says that governments are acting too early in withdrawing stimulus and this will clearly be contractionary. The case here is quite tricky to say the least. It seems that the real question is how credible countries will manage their debts while handling the crisis.

Trichet argument might be true if higher stimulus would automatically cause higher interest rates and government debt snowballing. Here stimulus would crowd out investment spending and consumption of durable goods significantly, run on banks might take place. But it’s hard if not impossible to assess the impact of each effect. The main question with this argument is if governments decrease deficits and if interest rates in fact go down will that create such a big confidence in economy that increase in consumption and investment will offset government spending cuts? This seems very like self-fulfilling expectations; if ECB can convince enough people to believe in such mechanism then people’s actions on such beliefs will make mechanism true.

On the other hand Krugman`s text-book type argument seems very reasonable as big part of the world is in liquidity trap (short term interest rates are virtually zero) thus making fiscal expansion very effective. This argument becomes even stronger if one looks in corporations’ balance sheets, which have loads of cash savings corporations don’t want to invest in real economy.

There is yet another important and difficult economic policy issue from the side of monetary policy. When is the right time for central bankers to pump out liquidity that was thrown in the system to fight with the crisis? If it’s done too early it may send economy back into recession. If it’s done too late there are threats of high inflation.

So with what we are left. Consumption growth is still fragile. The rise in investment spending is somewhat limited as there is already much of excess capacity. Net exports for the world are 0 nothing to take from there unless we start trading with aliens. Economic policy becomes crucial here. It is probably not even what governments do but the quality how they do that is important.

The second weekly review is ready to tell you about car industry in one of the emerging markets

Driving East

Having my internship in transport logistics in Russia, I’d like to share my observations of the peculiar development of automobile market in one of BRIC countries, and explain which investment opportunities it brings on the table.

Horrific Past

In mid-2008, global car market literally crashed. A slow recovery was seen in 2009; nonetheless, sales volumes are still far behind the peak level in summer 2008. The overall mood in the automobile industry can be represented with stock price fluctuation of such a giant as Volkswagen Group, producing famous Volkswagen, Audi, Skoda and such luxurious brands as Bentley, Lamborghini and Bugatti.

In boom years cars, being normal good, were at high demand, since consumers were wealthier in those years. Reaching a peak in summer 2008, car sales then started to decline dramatically. Renault Group, for example, lost nearly 80% of their profit in 2008, compared to the previous year. Moreover, during that year and year of 2009, a secondary car market became more popular than a primary one. Drivers were ready to incur a risk of buying a used car than going to a more expensive saloon for a new auto.

 In winter, 2010, a glimpse of hope appeared when governments of major European countries, in which car market makes a significant part of countries’ GDP, successfully introduced subsidies for consumers buying new cars. Some investors, however, consider sale growth based on subsides to be artificial, without providing real ground for future growth. These statements appeared to be true, since in April and May car sales in Europe declined (8.7% fall in May).

Financial markets clearly mirrored the situation in real sector. From 2006 till summer-autumn of 2008 stock prices of all public listed car manufacturers were rising, including Volkswagen AG. At the peak share price reached as high as 900 USD. Since then, prices fell substantially, now leveling out at around 70 USD. Trade volumes after autumn 2008, when most short-term speculators and scared investors dumped their stocks, declined and haven’t fully recovered since then.

Volkswagen AG share price and trade volume 2006-2010. Source: Bloomberg

Hopeful Future

While the eyes of most investors are directed to Western markets, I would encourage them to take a look a bit “Easter”. In times when European market falls at mentioned 8.7% level, Russian car market rises 31%. Partly, this growth is created by the subsidies coming from the government, but mostly this growth is determined by positive background and outlook of overall economy in that country. Such a high figure signals of great potential on this emerging market. Frankly, 2.5 years ago, at the bottom of car sale market, Volkswagen opened its own plant in Russia, in Moscow region, feeling the great potential of that country. Russian Statistics Agency “Autostat” evaluates Russian car market as the fifth biggest market in Europe. When in Germany sales are falling 35%, 11% in France, 14% in Italy, Russian 31% growth in May gives it a potential to be a European leader in the near future..

One of the most successful representatives of local car manufacturers, that appears to me, as an investor, very attractive, is “Sollers”, listed on Russia Stock Exchange. Being a partner of Italian Fiat and South Korean SsangYong Motor Company, “Sollers” manufactures and distributes their models in Russia and Central Asia, as well as it produces its own brand UAZ, which enjoys rather high demand of Russian consumers. It has 3 plants in Russia, with one recently opened in Vladivostok, the only car manufacturing plant in Russia’s Far East. New plant opening signalizes about increased manufacturing volumes, and, thereby, sales volumes. In addition, “Sollers” plans to start manufacturing Chrysler's Jeep brand in 2010.

These facts should not be missed by investors, if they wish to earn on car market. Car market is reviving, not to say more, it is shooting in emerging markets, which is often too difficult to notice. When Western countries still suffer from recession in many industries, it might be a good decision to diversify the portfolio with some “emerging” shares and be the first one who gains on them.

Written by Vadims Pikarevskis on behalf of SSE Riga Investment Fund

Investment Fund is happy to announce the new Board for 2010-2011

The new Board members are:  

Vadims Pikarevskis - Chairman of the Board

Rihards Zauers - Chief Investment Game Organizer

Uģis Rožkalns - Corporate Relations Manager

Ivan Mihhejev - Chief Macroeconomist

Andrius Oleinikovas - Chief Investmet Officer

We express our sincere gratitude to those who contributed to iFund activities this year and we are looking forward to accepting new members to our society. In August Investment Fund Associates will be announced. Together we are going to reach new horizons in 2010-2011!

Sincerely,

SSE Riga Investment Fund

iFund launches Weekly Reviews

It is our pleasure to introduce the new activity taken by Investment Fund of SSE Riga. Every Monday on our webpage there will be published most interesting news from the world of Economics and Finance. The reader will find our point of view on the breaking events and their impact on financial markets.

Enjoy!

Enjoy the first Weekly Review about Euro adoption in Estonia

Euro – love it or loathe it, but you’ll get it

Accession to the Euro zone has become an idée fixed for all three Baltic States since joining the European Union.  The first deadlines were set at a year 2007; however, Baltic economies were not ready at that time. The governments kept indulging their obsessions and set new dates for Euro introduction. It was hardly believable, taking into account monetary and fiscal policies they were pursuing. However, only three year later, at the beginning of 2009, Estonia gets a waiver that 2010 was going to be its trial year, the year when the performance of the economy would be monitored by European institutions.

Criteria revisited

The criteria for Euro adoption are set by Maastricht criteria, and looking from its perspective, Estonia is doing well:

• Inflation rate – -0.7% (1% maximum);
• Budget deficit – 2.4% of GDP (-3% maximum);
• Gross government debt – 9.6% of GDP (60% maximum);
• Exchange rate regime is fixed to euro in Estonia since 2004 versus two years required.

Nevertheless, there has been a lot of talking about the costs of fulfilling these criteria. The strongest argument is based on basic macroeconomic idea of multiplier process. Namely, opponents state that in order to restrain budget deficit and government debt public spending was severely reduced, leading to further decline in demand and making real GDP substantially decline (-14.1% in 2009 only). It is understandable that such a decline is created by an external shock, meaning shrinking volumes of international trade; however, tight governmental policy is also believed to fuel it. In addition, low demand lead to low employment and slow or even negative growth in prices.

One leg in the Euro

Those who follow Baltic economic news probably know on what state of admission procedure Estonia is now. For those who missed the news – Estonian economy was monitored by European Commission and European Central Bank in the spring, later on it was approved by European Council and now both supporters and opponents of Euro are waiting for July 13^th when the final decision will be announced by the ECOFIN. Nevertheless, it is inevitable to admit that now there exists no mystery around accession; after announcement of European Commission on 18^th of June it is almost 100% probably the Euro will be in Estonia.

The matter of interest

Nevertheless, general economic indicators of past tendencies in the economy are not of such great interest from our perspective – investment activities. It is taken as granted: Euro – love it or loathe it, you will not live without it. Thus, the matter of importance is what fruitful patterns and dangerous changes can euro introduction bring.

Different investing activities will be affected to different degrees. To start off, forex trading will not be substantially affected, since, due to kroon being pegged to euro, trading kroone against foreign currencies us the same as trading euro against respective currencies. Secondly, equity market will be influenced only to the extent of shares trading, due to non-existence of other commodities on Estonian market. So, the changes come from the following changing after euro introduction matters:

Exchange rate. Investment during next month (until 18^th of June) can be associated with higher degree of uncertainty. Reasoning is that there is no proof that official exchange rate between EEK and EUR will be set at present level. It will be announced by ECOFIN. Change in exchange level would be basically equal to devaluation. Since majority of high political and economic figures state that D-word is not and has never been an option we shall not anticipate different exchange rate to be set. (Currently Estonian Kroon (EEK) is exchanged by Eesti Pank at the rate of 15.6466EEK for 1 EUR).

Uncertainty. Obviously the promising perspective is stability and certainty brought by strong international currency. This makes foreign investors be more confident in local equity and therefore more intense competition can occur; this usually makes prices more volatile – higher increases and lower decreases. Also lower uncertainty yields into lower interest rates which makes capital investment more attractive for both local and foreign capital. Thus, one should expect creation of new companies and development of existing ones. Introduction of new capital usually either enlarges businesses or makes them more productive; both lead to higher returns.

Heaven or Hell?

Of course introduction of Euro in Estonia is not a matter of such interest and public attention as, for instance, BP’s oil spill, it deserves proper attention, especially here in Baltics. Maybe the costs are stated to be high by opponents, but no one of them is able of undermining and diminishing the benefits and prospective dangers.    

Written by Ivan Mihhejev on behalf of SSE Riga Investment Fund

The Investment Game 2010 is over!

We congratulate the winners of the Investment Game 2010:
1st place - Emils Berzins (19.4% return)
2nd place - Martins Sveds (17.38% return)
3rd place - Miina Karafin (15.07% return)

We thank everybody for participation, and wish you good luck in the real equity markets! As well as that, we hope to see you next year.

Best Regards,
SSE Riga Investment Fund

Dive into the world of stock markets with Investment Game 2010!

On January 11, 2010, the largest and the oldest online stock market simulation in the Baltic States Investment Game 2010 ( http://www.invest-game.com) starts!


The game provides you with a great opportunity to evaluate your strengths in investing, learn a lot about finance and capital markets, compete against thousands of enthusiastic players from all over the world and feel the taste of risk and passion. It is an chance you cannot miss!

The game this year is organised by the Investment Fund of the Stockholm School of Economics in Riga in cooperation with NASDAQ OMX Riga and Pivot Capital Management.

We are glad to announce that the Investment Fund Board 2009-2010 has started its work.

The new board members are:

Justas Šaltinis - Chairman of the Board

Dmitrijs Timofejevs - Chief Investment Game Organizer

Pavels Osipovs - Corporate Relations Manager

Justina Banytė - Chief Macroeconomist

Toomas Tamra - Chief Investmet Officer

We would like to thank everyone who contributed to the iFund activities last year, especially the previous board members, and are looking forward to achieving new goals.

Faithfully,

Investment Fund Board 2009-2010

The Investment Game 2009 will start at the end of October

The most popular investment game in the Baltic States will be launched again in less than two weeks - on October 27. Similarly to the previous year the game will consist of two stages, during which players will have an opportunity to compete for valuable prizes. Total prize pool will amount to 3000 EUR in cash as well as golden coins from Tavex to the best weekly performers.

For more information visit www.invest-game.com.

The Investment Fund Board 2008-2009 members have started their work.

The new board members are:

Vitalijs Silvestrovs - Chairman of the Board
Laurynas Barauskas
Pavels Berezovskis
Agne Kapociute
Veiko Visnapuu

We thank everyone who contributed to iFund activities during the previous year and are looking forward to new achievements.

Sincerely,
Investment Fund Board 2008-2009

 This year two new companies have become sponsors of iFund:

Linedata Services - Technological Partner

Finasta - Long-term Partner

We are looking forward to beneficial partnership and sustained relations.

Investment Game 2008

iFund is proud to announce that Investment Game 2008, which started on the 29th of October, has become even more popular this year setting a new all-time high. Although only a week has passed since iGame was launched, about 5000 users have registered on the web-page.

For more information follow to www.invest-game.com

Tuesday, 19th June 2007

We are happy to announce the Investment Fund Board 2007-2008:

Marius Bausys - Chairman of the Board
Olga Kozlova
Dmitrijs Golubnicijs
Mindaugas Mazeikis
Dmitrijs Minajevs

Thank you all who put their effort into the work of the organization during the year!
Looking forward to new achievements and higher results!

Sincerely,
Investment Fund Board 2006-2007

Monday, 5 June 2007

IFund is back from a promotional visit to Moscow. We have made presentations in the top economics high schools: Moscow State University (МГУ), Moscow Sate Institute of International Relations (МГИМО), Higher School of Economics (ВШЭ). Contacts have been established with the administration and faculty, as well as agreements to promote the Investment Game 2008 among the students of the universities. In the recent years, the Investment Game became known to all largest univesities in all three Baltic states, yet the huge Russian market has been left almost unpenetrated. The current visit is expected to strengthen cooperation with the local higher educational establishments and bring many more players and investors to the next Investment Game.

Tuesday, 21 May 2007

Mr Roberts Idelsons, the head of Parex Asset Management, is giving a guest lecture today at SSE Riga (Soros auditorium). The topic is: "Investment Process at PAM". The presentation starts at 12:05. The .ppt file can be found in the Public Folders (Student-Investment Fund).

Monday, 16 April 2007

The Investment Game 2007 is over! With a record number of more than 6000 participants, the winners are:

Tuesday, 13 March 2007

We are glad to announce that Mindaugas Mażeikis receives a scholarship from the Investment Fund for the top score on the Managerial Economics course 2007.

Friday, 23 December 2006

The autumn round of the Investment Game is closed. The number of participants exceeded 5000 today, which is an unexampled figure. The new round will begin in January, and the portfolio values will not be zeroed.

iFund wishes you a merry Christmas and a happy New year! See you in 2007!

Friday, December 1, 2006

Today, the number of the iGame registered participants hit the all-time high - 4099 users (the previous record was 3765 in 2004). The investment rush continues!

Friday, Novermber 24, 2006.

iFund is conducting a seminar in cooperation with Junior Achievement Latvia for economics teachers and students of Latvian secondary schools at SSE Riga (REA) premises. The Investment Game, its principles of operation, goals, data will be introduced to the audience, giving more incentive for secondary school students who are interested in economics and finance to participate in our stock market simulation game.

A presentation will be given by iFund Equity Research manager Niklavs Zemzaris. The seminar is organizad with the help of Dmitrijs Murins, Oskars Cimermanis, and Boriss Kuzmins.

Links: http://www.jal.lv/index.php?p=16&jid=208