Unbeknownst to most, the Ukraine crisis has had a surprising effect on the important global palm oil market—it has caused it to tumble. Palm oil is an important ingredient in a wide range of products, from soap to food, but recently, a glut of sunflower oil has lowered wholesale demand for the substance. Ukraine and Russia have both seen bumper sunflower crops this year, and because of the turmoil in the region, have been eager to sell it immediately, creating a wealth of global supply that has hurt palm oil prices. That is bad news for economies like Indonesia and Malaysia, who together produce 80% of the world’s palm oil. The declining prices have huge implications for Indonesia, as much of the country’s banking portfolio is backed by palm oil, meaning the asset quality of the country’s banks is declining rapidly. Palm oil prices have fallen 30% this year.
FINSUM: While this news may be very poor for Southeast Asia, it is great news for European food suppliers like Nestle, who are seeing the lowest prices in years for one of their principal raw materials.
Banks are beginning to protest over the new potential imposition of Basel capital rules which they say would make equity swap and borrowing transactions 4x to 5x more expensive than at present. Such transactions are massively important, as they are the mechanism which allow for investors to freely “short” certain stocks by selling in the market after borrowing them. Essentially, the banks do not want equity borrowings to be considered loans, as that would put them in a much riskier category for Basel III purposes, and mean that costs would skyrocket. The market for equity borrowing is quite large, with $760 bn of equities currently on loan in the market. The segment is a highly profitable one for banks, as it is an area where they can make hedged profits. Banks say the new rules would push equity borrowings into the shadow banking space and increase systemic risk.
FINSUM: This is a seemingly mundane but very significant story. Short-selling is considered a fundamental mechanism for fair market pricing, but if costs were to skyrocket, there would likely be much less of the activity.
Even a casual onlooker has noticed that the art market is surging—valuations are very high, there are plentiful buyers, and the market is developing into a professionalised asset class. However, despite the high sales, major auction house stocks like Sotheby’s and Christie’s are suffering, with the former down from $53 in January to $41 today. Heavy criticism of Sotheby’s by Dan Loeb might explain the stock’s weakness, but other auctioneers, like Poly Culture Group, which is China’s third-largest house, has seen its share price fall 14% since its IPO in May. Evidently, there are two main issues driving the share price declines. Firstly, despite high sales prices, the houses make little on individual high-priced items—it is volume that is needed, and they have not been able to create that. Secondly, investors’ obsession with “scalability” has made the auction house model look less appealing as the companies always need to fight for the next item to sell, and physical spaces of auction mean only so much can ever be sold.
FINSUM: This is quite an interesting story on the stark divergence between the art market, and the businesses that drive it. Despite the former’s success, the latter is ailing.
A new Reuters story has exposed a major link between western firms and the shadowy Chinese fund management industry that could threaten the financial system. In 2012, western firms were allowed to establish joint ventures with Chinese fund management companies in order invest in the country. As such, many firms, including CITIC Prudential, UBS SDIC, State Street Global Advisors (SSGA), Invesco Great Wall and Bank of Communications Schroders, partnered with Chinese firms and began issuing high risk loans to subprime borrowers. The Chinese fund management companies (FMCs) often operated at arms-length, with little oversight from the foreign parent, and apparently made highly risky loans from 2012 onwards. Analysts say the Chinese government opened the door to foreign entry “after all the pretty girls were taken”, meaning that all the solid borrowers had already accessed credit, leaving only those at the very bottom of the barrel to which to lend. Many wealth management defaults in China have been rescued by the government, but there is no precedent for saving a foreign-backed fund management company, which may mean western parents will be on the hook to bailout their partners.
FINSUM: This is a very conclusive link of how the developing Chinese financial storm could engulf western firms. The list of companies above is far from exhaustive, and many large companies may be in the same position. This is one to keep an eye on.
Far from the sketchy world of underground bookies taking bets in their basement, traders are starting to view sports betting as a legitimate asset class. New betting exchanges, like BetFair, allow users to both make and take bets, much like buying and selling options, which has made the practice popular with financiers. Participants generally wager on the correct outcome, or which way the odds will move ahead of the competition. “It’s the same as spread betting. You are effectively trading on volatility. The risk is you get it wrong,” says Peter Webb of BetAngel. However, the biggest obstacle for the industry is gaining and proving liquidity. The average horserace gets about $800k of bets, while the entire online gambling industry is worth about $30 bn annually. The issue is, no one is yet sure what percentage of the overall market is accounted for by sports betting, though it is likely to be small. The recent legalisation of online betting in the US is considered to be a major market driver for sports gambling.
FINSUM: This is still a very young asset class that suffers from a dingy reputation. However, it is not hard to imagine it becoming popular is some niche asset management circles.
A group of credit hedge funds, who have become the primary buyers of Puerto Rican debt following its downgrade to junk status, have highlighted a very important issue concerning the island’s economy. Puerto Rico's economic measuring protocols are grossly out of date—having not been updated since 1954—and as such may have woefully undermeasured the country’s GNP performance over the last several decades. Since Puerto Rico is used an offshore production center by US companies, who can lower their tax bills by artificially inflating the prices they pay to themselves for the goods they produce their, the island has been unwittingly factoring in a much higher total inflation figure than the real economy has been seeing. As such, GNP has been adjusted downwards for inflation, making growth seem much smaller than it may actually have been. Official figures say that the island’s economy has shrunk 11% since 2005, but factoring in the error, the group of funds argues the economy has actually grown between 3% and 11%. All of this means that the island might have had its credit-worthiness undervalued significantly.
FINSUM: This is a very interesting, if somewhat speculative, story. These funds obviously have a vested interest in arguing this, but their case does seem to hold water.