The news flow in North Africa remains sensational and there seems to be much to be confused about but at Silk Invest we always elect to remain rational by focusing on the essential factors that make up the underlying value.
Here’s what is on our mind these days:
General Qadaffi has now gone ‘all in’ on the geopolitical poker game with his defiance. These developments in Libya have, apart from lamentable violence, propelled a new massive oil price spike. Simply put, this is obviously not good news for the fragile recovery of major oil importers such as the economies of the US, China and Europe economies as it only further pushes inflation higher and and weighs on the activity of both consumers and corporates. Despite the above, these markets are again seeing inflows as a safe haven.
On the other hand a rise in oil prices is more of a positive fundamental for the economies that produce and export oil. The larger than expected budget surpluses will only further strengthen the competitiveness of these economies and their ability to cope with the price imbalances thanks to availability of high reserves.
Saudi Arabia has decided to invest around $35 billion in appeasing its population. While this is a large amount, it could also be regarded as a free option when considering that the oil price spike will largely offset this amount.
Also, now that we have the Libya story, the news flow regarding Tunisia and Egypt has moved more to the background. That makes it easier for them to get on with the needed reforms.
One of the likely lessons that will be drawn from this ‘experience’ is that the economies that have both true growth potential and the possibility to reform will be a better place to invest than many of the developed economies that are struggling to keep their economies going.
This is also a very good time to be diversified into frontier fixed income. The Silk Road Income fund has been doing rather well in these circumstances. Its USD denominated average yield to maturity of just above 9% may well be the one of the investments that can help mitigate the risk of higher inflation.
Food for thought! We will shortly produce a research paper about this so stay tuned.
Comments on this entry are closed.