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วันพุธที่ 12 กันยายน พ.ศ. 2550
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Rubber news
MRE Elected To Head IRA
Source: MRE / May 28, 2007
At the Biennial General Meeting of the International Rubber Association (IRA) held on 13 May 2007 in Bangkok, Thailand, the MRE was elected to assume the chairmanship of the IRA for a two-year period from 2007 - 2008. Members of the IRA Management Committee elected for this new term comprise of eight associations/organisations as follows:-
Organisations domiciled in the producing areas
(i) Malaysian Rubber Exchange (MRE)
(ii) Thai Rubber Association (TRA)
(iii) Singapore Commodity Exchange Ltd. (SICOM)
(iv) Rubber Association of Indonesia (GAPKINDO)
Organisations domiciled in the consuming areas
(v) Rubber Trade Association of Europe (RTAE)
(vi) Rubber Manufacturers' Association, US/
Rubber Trade Association of North America Inc.
(vii) European Tyres and Rubber Manufacturers' Association (ETRMA)
(viii) Rubber Trade Association of Japan (RTAJ)
The IRA was established in 1971 and its membership is open to all Associations whose members are engaged in the production, consumption or marketing of natural rubber and all other organizations as approved by the general membership.
Amongst others, the objects of the IRA are:-
to provide a forum for the discussion of international commercial matters relating to natural rubber ;
to formulate International Contracts for natural rubber ;
to ensure observance of the sanctity and the ultimate enforcement of all IRA and linked contracts; and
to facilitate the continual improvement in the international trade in natural rubber .
Vietnam may raise rubber output to meet demand
Source: Akron Beacon Journal / May 28, 2007
Vietnam is considering an increase in its natural rubber output by 30 percent to 2010 by expanding plantations and improving yields at small holders, the Vietnam Rubber Association said.
The nation will increase output of the material used to make tires and shoes to 700,000 tons over three years from 540,000 tons last year, said Tran Thi Thuy Hoa, secretary-general of the Vietnam Rubber Association.
Rubber prices in Tokyo have risen 44 percent in the past two years partly because of surging demand for automobiles in China , the world's second-largest vehicle market.
China is the biggest buyer of Vietnamese rubber , accounting for about 66 percent of the country's natural rubber exports last year.
"The high demand and favorable price of natural rubber in recent years has encouraged the government to support the expansion of rubber areas even in sub-optimal regions and in neighboring countries such as Laos and Cambodia ," Hoa said.
Vietnam 's rubber plantation area is expected to rise to 1.7 million acres by 2010.
The Vietnam Rubber Corporation is the country's largest natural rubber producer with output of 325,900 tons in 2006, or 60 percent of the nation's production.
Vietnam, Laos ink major rubber deal
Source: Sai Gon Giai Phong – Translated by an Dien / 16 May 2007
The Vietnam Rubber Industry Group (VRIG) will pump US$18.7 million into processing rubber and industrial crops in Laos as part of a deal signed Wednesday.
Under the 30-year project, VRIG's Quasa-Geruco joint stock company will be in charge of cultivating rubber and timber as well as building a rubber -processing plant in an Laos' Savannakhet Province.
Quasa-Geruco has a chartered capital of VND120 billion (US$7.5 million) contributed by VRIG's seven members.
The group recently disclose a plan to spend VND2 trillion ($124.8 million) to develop 136,000 hectares of rubber trees in the Vietnamese Central Highlands provinces by 2010.
Vietnam rubber prices rebound on mounting global demand
Source: SGGP – Compiled by Dong Ha / 16 May 2007
Vietnam 's export rubber price is expected to enjoy a 10 percent jump on the world market for the rest of this year, fueled by increasing demand and thin supplies, analysis said.
They also forecast that Vietnamese-sourced rubber shipments to China – the world's largest rubber importer – would see price hikes of 20 percent to US$2,400 per ton from the current $2,000.
On world market the price would average at $2,200 per ton.
The world produces about nine million tons of natural rubber a year and consumes most of it, leaving a delicate balance between supply and demand.
However, a recent conference on world rubber industry in Thailand predicted that global demand would jump by more than 6 percent for the rest of the year.
Thailand , Indonesia , Malaysia and Vietnam are all gearing up for a rise in production on the hope of favorable weather and better yields.
But any rise in output would be absorbed by growing demand in China , India and Europe , analysts said.
China has to import 1.75 million tons of natural rubber for its surging tire industry this year - a near 9 percent rise over the last year.
India 's tire industry is also booming and could boost imports by up to 20 percent to 100,000 tons of natural rubber in the year ending March 2008.
Vietnam General Rubber Corporation (Geruco) therefore forecast a steady increase in export prices in the near term, buoyed the aforesaid demand.
Vietnam earned $254 million of rubber exports in the first quarter,to mainly to China , South Korea , Japan and the U S , a year-on-year 5.6 percent down due to globally falling prices.
Of the figure, $101 million came from the Chinese market, which, as Vietnam 's biggest buyer, accounted for about 66 percent of the country's natural rubber exports last year.
It is expected to ship roughly 780,000 - 820,000 tons of rubber this year, a rise of between 12 percent and 17 percent over the last year.
The Vietnamese government has recently supported the expansion of rubber areas even in sub-optimal regions and in neighboring countries such as Laos and Cambodia .
Vietnam 's rubber plantation area is expected to rise to 1.7 million acres by 2010.
The sector has over 70 latex processing plants each with a production capacity of 20,000 tons per year.
Source: MRE / May 28, 2007
At the Biennial General Meeting of the International Rubber Association (IRA) held on 13 May 2007 in Bangkok, Thailand, the MRE was elected to assume the chairmanship of the IRA for a two-year period from 2007 - 2008. Members of the IRA Management Committee elected for this new term comprise of eight associations/organisations as follows:-
Organisations domiciled in the producing areas
(i) Malaysian Rubber Exchange (MRE)
(ii) Thai Rubber Association (TRA)
(iii) Singapore Commodity Exchange Ltd. (SICOM)
(iv) Rubber Association of Indonesia (GAPKINDO)
Organisations domiciled in the consuming areas
(v) Rubber Trade Association of Europe (RTAE)
(vi) Rubber Manufacturers' Association, US/
Rubber Trade Association of North America Inc.
(vii) European Tyres and Rubber Manufacturers' Association (ETRMA)
(viii) Rubber Trade Association of Japan (RTAJ)
The IRA was established in 1971 and its membership is open to all Associations whose members are engaged in the production, consumption or marketing of natural rubber and all other organizations as approved by the general membership.
Amongst others, the objects of the IRA are:-
to provide a forum for the discussion of international commercial matters relating to natural rubber ;
to formulate International Contracts for natural rubber ;
to ensure observance of the sanctity and the ultimate enforcement of all IRA and linked contracts; and
to facilitate the continual improvement in the international trade in natural rubber .
Vietnam may raise rubber output to meet demand
Source: Akron Beacon Journal / May 28, 2007
Vietnam is considering an increase in its natural rubber output by 30 percent to 2010 by expanding plantations and improving yields at small holders, the Vietnam Rubber Association said.
The nation will increase output of the material used to make tires and shoes to 700,000 tons over three years from 540,000 tons last year, said Tran Thi Thuy Hoa, secretary-general of the Vietnam Rubber Association.
Rubber prices in Tokyo have risen 44 percent in the past two years partly because of surging demand for automobiles in China , the world's second-largest vehicle market.
China is the biggest buyer of Vietnamese rubber , accounting for about 66 percent of the country's natural rubber exports last year.
"The high demand and favorable price of natural rubber in recent years has encouraged the government to support the expansion of rubber areas even in sub-optimal regions and in neighboring countries such as Laos and Cambodia ," Hoa said.
Vietnam 's rubber plantation area is expected to rise to 1.7 million acres by 2010.
The Vietnam Rubber Corporation is the country's largest natural rubber producer with output of 325,900 tons in 2006, or 60 percent of the nation's production.
Vietnam, Laos ink major rubber deal
Source: Sai Gon Giai Phong – Translated by an Dien / 16 May 2007
The Vietnam Rubber Industry Group (VRIG) will pump US$18.7 million into processing rubber and industrial crops in Laos as part of a deal signed Wednesday.
Under the 30-year project, VRIG's Quasa-Geruco joint stock company will be in charge of cultivating rubber and timber as well as building a rubber -processing plant in an Laos' Savannakhet Province.
Quasa-Geruco has a chartered capital of VND120 billion (US$7.5 million) contributed by VRIG's seven members.
The group recently disclose a plan to spend VND2 trillion ($124.8 million) to develop 136,000 hectares of rubber trees in the Vietnamese Central Highlands provinces by 2010.
Vietnam rubber prices rebound on mounting global demand
Source: SGGP – Compiled by Dong Ha / 16 May 2007
Vietnam 's export rubber price is expected to enjoy a 10 percent jump on the world market for the rest of this year, fueled by increasing demand and thin supplies, analysis said.
They also forecast that Vietnamese-sourced rubber shipments to China – the world's largest rubber importer – would see price hikes of 20 percent to US$2,400 per ton from the current $2,000.
On world market the price would average at $2,200 per ton.
The world produces about nine million tons of natural rubber a year and consumes most of it, leaving a delicate balance between supply and demand.
However, a recent conference on world rubber industry in Thailand predicted that global demand would jump by more than 6 percent for the rest of the year.
Thailand , Indonesia , Malaysia and Vietnam are all gearing up for a rise in production on the hope of favorable weather and better yields.
But any rise in output would be absorbed by growing demand in China , India and Europe , analysts said.
China has to import 1.75 million tons of natural rubber for its surging tire industry this year - a near 9 percent rise over the last year.
India 's tire industry is also booming and could boost imports by up to 20 percent to 100,000 tons of natural rubber in the year ending March 2008.
Vietnam General Rubber Corporation (Geruco) therefore forecast a steady increase in export prices in the near term, buoyed the aforesaid demand.
Vietnam earned $254 million of rubber exports in the first quarter,to mainly to China , South Korea , Japan and the U S , a year-on-year 5.6 percent down due to globally falling prices.
Of the figure, $101 million came from the Chinese market, which, as Vietnam 's biggest buyer, accounted for about 66 percent of the country's natural rubber exports last year.
It is expected to ship roughly 780,000 - 820,000 tons of rubber this year, a rise of between 12 percent and 17 percent over the last year.
The Vietnamese government has recently supported the expansion of rubber areas even in sub-optimal regions and in neighboring countries such as Laos and Cambodia .
Vietnam 's rubber plantation area is expected to rise to 1.7 million acres by 2010.
The sector has over 70 latex processing plants each with a production capacity of 20,000 tons per year.
วันอังคารที่ 11 กันยายน พ.ศ. 2550
Afet changes rubber contract terms again
Afet changes rubber contract terms again
Source: Bangkok Post / July 26, 2007
The Agricultural Futures Exchange of Thailand (Afet) has again revamped the contract terms for ribbed rubber smoked sheet, the most active commodity on the futures market, in an effort to increase market liquidity, said Pornchai Patiparnprechavut, a senior vice-president.
The new contract for ribbed rubber smoked sheet, or RSS3, is scheduled to take effect tomorrow, Mr Pornchai said yesterday.
He pointed out that one of the critical changes dealt with rubber quality standards. It will not only meet requirements of the so-called Green Book, or International Standard of Quality and Packaging for Natural Rubber Grades, but also those of major tyre manufacturers. In addition, those trading rubber would be guaranteed by rubber sheet producers for 60 days.
''With better specifications, more international rubber traders may come to trade in the market since that would enable them to deliver real products to tyre manufacturers,'' he said.
The maximum position limit for single investors would rise to 3,000 contracts from 500 now. The limit for each hedger in every single delivery month would increase to 500 contracts from 100.
Trading contract lengths will be extended to a maximum of nine months instead of six months. That would ensure hedgers that they could deliver rubber in the physical market.
However, three out of 10 brokers said they had heard from Afet about the changes but did not know exactly when they would take effect.
They agreed that new contract terms could benefit investors and
hedgers, as well as improve liquidity.
''Based on our historical trading statistics, the market is less liquid when a delivery month is coming. Three more months would help since investors do not need to deliver rubber,'' an analyst said.
The three-year-old futures exchange still faces liquidity problems, admitted Mr Pornchai. It's also a problem that investors see the Afet as a market for trading farm products, he said. It has worked hard to bolster its image as a derivatives market.
The Afet handled an average of 100 contracts per day in its first year, with that figure jumping to 600 last year. It expects to see 800 contracts each day by the end of this year.
To promote the futures market, the Afet would hold a commodity futures event at the Stock Exchange of Thailand on August 4 to educate investors about products and opportunities. A highlight will be real-time simulations of buying and selling.
Source: Bangkok Post / July 26, 2007
The Agricultural Futures Exchange of Thailand (Afet) has again revamped the contract terms for ribbed rubber smoked sheet, the most active commodity on the futures market, in an effort to increase market liquidity, said Pornchai Patiparnprechavut, a senior vice-president.
The new contract for ribbed rubber smoked sheet, or RSS3, is scheduled to take effect tomorrow, Mr Pornchai said yesterday.
He pointed out that one of the critical changes dealt with rubber quality standards. It will not only meet requirements of the so-called Green Book, or International Standard of Quality and Packaging for Natural Rubber Grades, but also those of major tyre manufacturers. In addition, those trading rubber would be guaranteed by rubber sheet producers for 60 days.
''With better specifications, more international rubber traders may come to trade in the market since that would enable them to deliver real products to tyre manufacturers,'' he said.
The maximum position limit for single investors would rise to 3,000 contracts from 500 now. The limit for each hedger in every single delivery month would increase to 500 contracts from 100.
Trading contract lengths will be extended to a maximum of nine months instead of six months. That would ensure hedgers that they could deliver rubber in the physical market.
However, three out of 10 brokers said they had heard from Afet about the changes but did not know exactly when they would take effect.
They agreed that new contract terms could benefit investors and
hedgers, as well as improve liquidity.
''Based on our historical trading statistics, the market is less liquid when a delivery month is coming. Three more months would help since investors do not need to deliver rubber,'' an analyst said.
The three-year-old futures exchange still faces liquidity problems, admitted Mr Pornchai. It's also a problem that investors see the Afet as a market for trading farm products, he said. It has worked hard to bolster its image as a derivatives market.
The Afet handled an average of 100 contracts per day in its first year, with that figure jumping to 600 last year. It expects to see 800 contracts each day by the end of this year.
To promote the futures market, the Afet would hold a commodity futures event at the Stock Exchange of Thailand on August 4 to educate investors about products and opportunities. A highlight will be real-time simulations of buying and selling.
Crisis of Money Markets Reduces Oil Prices
Crisis of Money Markets Reduces Oil Prices
Walid Khadduri Al-Hayat - 19/08/07//
In the last several weeks, the drop of around 7-10% in international money market indicators in the last three weeks, due to the mortgage crisis in the US, has led to a roughly equivalent fall in oil prices. The price of Brent North Sea oil has hovered between $70-78 a barrel, and fell for a time to $68. This reduction is considered quite limited in comparison with previous experiences, when the price of crude oil fell to low levels due to international economic factors.What is the relationship between money markets and crude oil prices?The price of oil has fallen because investors and speculators have pulled money out of the oil market, due to the need for financial liquidity to cover losses in money markets. The wave of falling prices was likely to have continued, were it not for the beginning of the storm season in the western Atlantic and the spread of storms to the Gulf of Mexico and the southern coast of the US. This is where many sea and land oil fields are located, along with the most important ports for importing oil to the US. American weather observatories are expecting that Erin and Dean mark the beginning of a series of storms expected over the coming weeks. We have actually begun to see some companies begin closing their sea platforms and halting production from the Gulf of Mexico, as the firms move their workers and engineers to safe areas on dry land. For example, Shell has done this, halting the production of 50 million cubic meters of gas in the Gulf of Mexico; it evacuated some of its employees from sea platforms that are located in the path of the two storms. These developments have warned investors and speculators that the price of oil could rise once again, soon, especially because prices have yet to be greatly affected by financial developments and fall to low levels.A fire that broke out in an important refinery in the southern coast of the US, political and security news out of the Middle East, and news about the US' intention to put Iran's Revolutionary Guards on the list of terror organizations (meaning an escalation of the confrontation between the two countries, even if at the political and economic levels) all helped halt the slide in oil prices. This announcement about Iran, if it is implemented, will hinder the implementation of some important Iranian oil projects, while it will boost the type of danger of an expected confrontation between Washington and Tehran. Iran's Revolutionary Guards own a number of companies and some of them invest in the oil sector. The Guards are partners with foreign firms in developing the gigantic South Pars gas field; any boycott of these companies will mean confrontations of a new kind.Meanwhile, the news out of Iraq is getting worse. The kidnapping of an Oil Ministry official (responsible for exploration and Iraqi production) from one of the most important oil institutions in Baghdad, along with four director generals from the Ministry, is not encouraging for the possibility of seeing stability return to the country in the foreseeable future, no matter how much US President George Bush tries to polish up the picture of what is taking place in Iraq. Moreover, the incident, which was carried out by about 100 fighters dressed in police uniforms and using official government vehicles, will certainly act as a deterrent to international oil companies that want to send their employees to Iraq in the near future, if the Iraqi Parliament approves the new Oil Law, despite the huge quantities of reserves that are available in Iraq.At the same time, OPEC continues to insist on its position and affirm that there is no gap in supplies, and that the level of commercial oil reserves in industrial countries is quite reasonable, since it lies with in the average of the last five years (in the US alone, for example, there is more than a billion barrels of crude oil and oil products in the commercial reserve, which is 30 million barrels higher than the average of the last five years, according to the a statement last week by the Department of Energy). The OPEC Secretariat, in its most recent monthly report, revealed that there are now fears about the likelihood of a fall in international demand for oil in the remaining months of this year, due to the fall in value of international stock markets. This is a new factor that will deter OPEC states from deciding to increase production at their regular ministerial meeting on 11 September in Vienna. However, the final decision about this vital matter of oil prices in the coming phase (whether OPEC retains its current level of production at around 30 million barrels a day or increases it) won't be taken before the Vienna meeting.
*Specialist in energy affairs.
Walid Khadduri Al-Hayat - 19/08/07//
In the last several weeks, the drop of around 7-10% in international money market indicators in the last three weeks, due to the mortgage crisis in the US, has led to a roughly equivalent fall in oil prices. The price of Brent North Sea oil has hovered between $70-78 a barrel, and fell for a time to $68. This reduction is considered quite limited in comparison with previous experiences, when the price of crude oil fell to low levels due to international economic factors.What is the relationship between money markets and crude oil prices?The price of oil has fallen because investors and speculators have pulled money out of the oil market, due to the need for financial liquidity to cover losses in money markets. The wave of falling prices was likely to have continued, were it not for the beginning of the storm season in the western Atlantic and the spread of storms to the Gulf of Mexico and the southern coast of the US. This is where many sea and land oil fields are located, along with the most important ports for importing oil to the US. American weather observatories are expecting that Erin and Dean mark the beginning of a series of storms expected over the coming weeks. We have actually begun to see some companies begin closing their sea platforms and halting production from the Gulf of Mexico, as the firms move their workers and engineers to safe areas on dry land. For example, Shell has done this, halting the production of 50 million cubic meters of gas in the Gulf of Mexico; it evacuated some of its employees from sea platforms that are located in the path of the two storms. These developments have warned investors and speculators that the price of oil could rise once again, soon, especially because prices have yet to be greatly affected by financial developments and fall to low levels.A fire that broke out in an important refinery in the southern coast of the US, political and security news out of the Middle East, and news about the US' intention to put Iran's Revolutionary Guards on the list of terror organizations (meaning an escalation of the confrontation between the two countries, even if at the political and economic levels) all helped halt the slide in oil prices. This announcement about Iran, if it is implemented, will hinder the implementation of some important Iranian oil projects, while it will boost the type of danger of an expected confrontation between Washington and Tehran. Iran's Revolutionary Guards own a number of companies and some of them invest in the oil sector. The Guards are partners with foreign firms in developing the gigantic South Pars gas field; any boycott of these companies will mean confrontations of a new kind.Meanwhile, the news out of Iraq is getting worse. The kidnapping of an Oil Ministry official (responsible for exploration and Iraqi production) from one of the most important oil institutions in Baghdad, along with four director generals from the Ministry, is not encouraging for the possibility of seeing stability return to the country in the foreseeable future, no matter how much US President George Bush tries to polish up the picture of what is taking place in Iraq. Moreover, the incident, which was carried out by about 100 fighters dressed in police uniforms and using official government vehicles, will certainly act as a deterrent to international oil companies that want to send their employees to Iraq in the near future, if the Iraqi Parliament approves the new Oil Law, despite the huge quantities of reserves that are available in Iraq.At the same time, OPEC continues to insist on its position and affirm that there is no gap in supplies, and that the level of commercial oil reserves in industrial countries is quite reasonable, since it lies with in the average of the last five years (in the US alone, for example, there is more than a billion barrels of crude oil and oil products in the commercial reserve, which is 30 million barrels higher than the average of the last five years, according to the a statement last week by the Department of Energy). The OPEC Secretariat, in its most recent monthly report, revealed that there are now fears about the likelihood of a fall in international demand for oil in the remaining months of this year, due to the fall in value of international stock markets. This is a new factor that will deter OPEC states from deciding to increase production at their regular ministerial meeting on 11 September in Vienna. However, the final decision about this vital matter of oil prices in the coming phase (whether OPEC retains its current level of production at around 30 million barrels a day or increases it) won't be taken before the Vienna meeting.
*Specialist in energy affairs.
วันเสาร์ที่ 25 สิงหาคม พ.ศ. 2550
Markets remain a good bet in spite of high volatility
Markets remain a good bet in spite of high volatility
RICHARD BATTY
THE markets have been experiencing significant volatility as problems in the US sub-prime mortgage sector have rippled out across other countries and assets. But turmoil in the credit markets should be placed into a longer-term context.
The housing market has been an important driver for the US economy for several years, supported by strong population growth and a transformation in mortgage products. Higher interest rates finally called an end to the housing boom, with mounting weakness in terms of unsold homes, falling prices and foreclosures. This is not good news. Looking ahead, I anticipate that the housing recession will dampen US economic growth well into 2008.
There have been particular problems in the sub-prime mortgage sector. These are mortgages sold to people on relatively low incomes, often with some sort of low 'teaser' rate. As these reset, homeowners face much higher mortgage payments.
The difficulties have been compounded as many of these mortgages were packaged up into securitised bonds and then credit derivatives, complex financial instruments that allow mortgage brokers and investment banks to offset risk onto other investors such as hedge funds and insurance companies.
In the past few weeks, more investors have realised that as mortgages turn sour, the value of such products is significantly lower. The opaque nature of these transactions means that it is very uncertain what the scale of these losses has become or indeed where the losses even lie. A slump in investor confidence has caused the seizure of the wholesale commercial paper markets, where financial institutions and corporates raise short-term capital.
The central banks have aggressively injected liquidity into the money markets to restore investor confidence. As problems mounted in the money markets, the US Federal Reserve was forced to lower its discount rate - the interest rate that banks can borrow from the Fed at - in an attempt to alleviate some of these liquidity issues. The initial positive reaction from equities markets suggests the Fed may have made a good start down the road to solving the problems.
Looking ahead, there is the question of whether further action will be required. If the seizure in the money markets continues, this may result in cuts in other interest rates, such as Fed funds, the equivalent of base rates in the UK, or alternative action to improve liquidity. Meanwhile, volatile trading conditions are likely in a range of markets as distressed selling continues, carry trades are unwound and more bad news about investor losses appears.
But these difficulties have not come out of the blue. We have been aware of potential risks for some time, paying particular attention to the difficulties facing the housing market. As a result, our funds have been light in most of the affected US construction companies and we have steered clear of many of the mortgage providers that were particularly involved in the sub-prime mortgage sector.
We have generally been neutral on the investment banks, with a bias towards the quality end, reflecting their wide breadth of earnings. Our corporate bond funds have had a minimal exposure to structured credit instruments, and indeed generally steered clear of the riskier, higher-yielding bonds, preferring to invest in debt issued by more defensive and safer product and service providers. Our absolute return funds had fully hedged their credit exposure by the first quarter of the year.
Some commentators ask whether housing problems in the US could be replicated in the UK. In our opinion, the dynamics of the two housing markets are different. There has been little evidence that UK-based mortgage banks and building societies have been overly aggressive in the sorts of product that they have been selling in the last couple of years, mainly due to the watchful eye of the FSA. As long as the UK economy does slow in coming months, and there are signs that consumers are responding to earlier monetary tightening, then the Bank of England can put interest rates on hold.
We still consider the long-term prospects for equity and mainstream corporate bond markets are positive. We retain our heavy equity positions in managed portfolios as corporate profitability remains strong, balance sheets are in good order, and the global economy remains on a growth path, with flexible labour markets limiting inflation risks in most countries.
Clearly, a key risk to this scenario would be if economies slip into recession, hitting corporate profitability.
Richard Batty is global investment strategist at Standard Life Investments
Related topic
RICHARD BATTY
THE markets have been experiencing significant volatility as problems in the US sub-prime mortgage sector have rippled out across other countries and assets. But turmoil in the credit markets should be placed into a longer-term context.
The housing market has been an important driver for the US economy for several years, supported by strong population growth and a transformation in mortgage products. Higher interest rates finally called an end to the housing boom, with mounting weakness in terms of unsold homes, falling prices and foreclosures. This is not good news. Looking ahead, I anticipate that the housing recession will dampen US economic growth well into 2008.
There have been particular problems in the sub-prime mortgage sector. These are mortgages sold to people on relatively low incomes, often with some sort of low 'teaser' rate. As these reset, homeowners face much higher mortgage payments.
The difficulties have been compounded as many of these mortgages were packaged up into securitised bonds and then credit derivatives, complex financial instruments that allow mortgage brokers and investment banks to offset risk onto other investors such as hedge funds and insurance companies.
In the past few weeks, more investors have realised that as mortgages turn sour, the value of such products is significantly lower. The opaque nature of these transactions means that it is very uncertain what the scale of these losses has become or indeed where the losses even lie. A slump in investor confidence has caused the seizure of the wholesale commercial paper markets, where financial institutions and corporates raise short-term capital.
The central banks have aggressively injected liquidity into the money markets to restore investor confidence. As problems mounted in the money markets, the US Federal Reserve was forced to lower its discount rate - the interest rate that banks can borrow from the Fed at - in an attempt to alleviate some of these liquidity issues. The initial positive reaction from equities markets suggests the Fed may have made a good start down the road to solving the problems.
Looking ahead, there is the question of whether further action will be required. If the seizure in the money markets continues, this may result in cuts in other interest rates, such as Fed funds, the equivalent of base rates in the UK, or alternative action to improve liquidity. Meanwhile, volatile trading conditions are likely in a range of markets as distressed selling continues, carry trades are unwound and more bad news about investor losses appears.
But these difficulties have not come out of the blue. We have been aware of potential risks for some time, paying particular attention to the difficulties facing the housing market. As a result, our funds have been light in most of the affected US construction companies and we have steered clear of many of the mortgage providers that were particularly involved in the sub-prime mortgage sector.
We have generally been neutral on the investment banks, with a bias towards the quality end, reflecting their wide breadth of earnings. Our corporate bond funds have had a minimal exposure to structured credit instruments, and indeed generally steered clear of the riskier, higher-yielding bonds, preferring to invest in debt issued by more defensive and safer product and service providers. Our absolute return funds had fully hedged their credit exposure by the first quarter of the year.
Some commentators ask whether housing problems in the US could be replicated in the UK. In our opinion, the dynamics of the two housing markets are different. There has been little evidence that UK-based mortgage banks and building societies have been overly aggressive in the sorts of product that they have been selling in the last couple of years, mainly due to the watchful eye of the FSA. As long as the UK economy does slow in coming months, and there are signs that consumers are responding to earlier monetary tightening, then the Bank of England can put interest rates on hold.
We still consider the long-term prospects for equity and mainstream corporate bond markets are positive. We retain our heavy equity positions in managed portfolios as corporate profitability remains strong, balance sheets are in good order, and the global economy remains on a growth path, with flexible labour markets limiting inflation risks in most countries.
Clearly, a key risk to this scenario would be if economies slip into recession, hitting corporate profitability.
Richard Batty is global investment strategist at Standard Life Investments
Related topic
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