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For the past month, the investment question that has occupied most of my time has
been whether we should be positioning for rising or falling prices. Recent investor
meetings, both in Russia and in Western Europe showed that this question was at the
top of client concerns and – considering the market dynamic – this is not surprising.
Developed world price indicators charged toward zero over 1H09, and yet as they did
so the market moved in a reflationary manner.
Five year breakeven inflation indicators (see Chart 1) leapt from near zero to trade in
the 1-2% range, and famous investors like Hugh Hendry haemorrhaged money betting
– ironically accurately – that prices would fall. It all matters, because history teaches
that elevated inflation uncertainty (which could be broadly defined as inflation either
above 5% or below -1%) is highly negative for corporate performance. Whether you
are investing for the long- or the short-term, you need a clear view on inflation to
position with confidence.
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Although the first quarter was challenging for both Russian and global equities, the first
half of the year has proven very constructive for commodities investment. Russian
clients will certainly be aware that the outlook for commodities is key to the future of
their market. In this Comment, we compare recent market movements this year with
last.
Back in April, I distributed research taking a long view on commodities, based on the
outlook that stimulus plans from Russia to China to the US were all targeting
infrastructure spending. Clearly I was not alone in thinking this. The outcome was a
rapid rise in commodities prices, reminiscent of 1H08. Chart 1 shows a stunning
correlation between oil price movement this year and last.
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US President Barak Obama’s first visit to Russia has been hailed as a resetting of
relations. The Russian political establishment is taking an open approach but remains
cautious. Are we entering a new constructive era, or is this just a political show likely
to collapse as swiftly as it starts?
The Background
To consider this topic, it is essential to put Russia-US relations into context with some
background to understand the key divisions. Tension began to surge around 2003-04.
At this time, Russia was economically recovering thanks to strong oil price growth.
Along with economic improvement, the Putin administration was achieving popular
control, which set the path to a new political direction.
First came the Yukos affair. More than enough has been said about it already, but the
nature of this legal case set off alarm bells in Western capitals.
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Following a healthy rebound from its March low, Russia’s equity market has corrected sharply in recent weeks. At the same time, developed markets have traded sideways nd China has risen. What is behind these moves, and what are the forward risks? |
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