Smells Like Opportunity


So the concoction of China, oil prices, volatile forex market and increasing interest rates in the US is generally telling. Markets across the world are getting shivers (17 trillion market cap lost) and commodity prices are on a free fall. These are interesting times, albeit I won't overstate and imply an irreversible crisis.

All about China: There is no crystal ball to predict the exact manufacturing capacity that needs to be built to avoid under utilization. When you are betting on phenomenal scales in terms of capacity, any deviation in utilization can generate ripples in the economy and drag other countries which are interlinked. Then the Chinese administration opens its box of quick fixes. They don’t have many though. It’s either through currency manipulation or more rigid state initiated short term steps and curbs or by pumping money through its sovereign / semi-sovereign institutions into markets to arrest decline. None of these measures have any elements of a typical vision or plan. China gets away with this every time, because at the end of day, it’s a consuming economy with huge captive demand. And that is why there is a limit to which the growth can go down.

All about oil: This time around the glut in oil is supply driven. Blame it on the shale scare or the rigid stance taken by OPEC members to ring fence their market shares. Add to that, additional supply planned by Iran, post sanctions. Low oil prices are hurting the highly oil dependent economies, where either the cost of oil production is high or welfare expenditure is based on erstwhile high oil prices. Venezuela and Russia are classic examples. Even GCC economies are drawing from their sovereign reserves, built during good times. Just as extreme high oil prices are not sustainable, so are very low oil prices too. It should stabilize sooner than later as the sector consolidates.

All about capital markets: Even though the markets blame China and Oil for sell-offs, I would say that asset prices were already overpriced and needed some course correction.  There will be some more flab that needs to be shed, which was build on cheap money, before valuations stabilize and the trajectory is reversed. Plus, for bulky funds who have been accumulating across last two years, it’s time to book profits and distribute dividends to its investors. Nothing to worry, as they do it after every couple of years.

These seemingly correlated events may actually be just events happening around the same time with no relation. The anxiety developed to paranoia, as events unfolded in the beginning of the year. A bad omen, so to say. My expectation is that oil is expected to reverse to 40-50$ as the traders reverse their bet on future contracts. We will still see China growing at 6% and the markets will slowly reverse as portfolio funds start slowly accumulating after profit taking.

Just the extra fat got burned off to bring the assets into the right valuation perspective. Do I smell something? Smells like opportunity.

Low oil prices are hurting the highly oil dependent economies, where either the cost of oil production is high or welfare expenditure is based on erstwhile high oil prices.

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