We continue keeping you informed on the results of our activities, and the IFC specialists’ take on the situation and the processes in global and regional economies.

In April 2018, the value of assets of the WellMax investment portfolio increased by 1.16% in USD in EUR, which is equivalent to 14.8% per annum with monthly compounded interest. The annual yield amounted to 15.78% in rubles, and 14.72% in yuans, with monthly compounded interest.

The value of assets of the WellMax Premium investment portfolio increased by 0.63% in USD over the period from April 10, 2018 to May 10, 2018.

Last month’s moderate increase in the WellMax Premium investment portfolio asset value came, first and foremost, as a result of high volatility at the stock market overall, and especially among the securities represented in our portfolio. At the same time, it should be mentioned that our portfolio’s dynamics in 2018 has been steadily positive.

The steady financial results of the WellMax Premium investment portfolio, in turn, are a product of the diligent analytical work conducted by us in 2017. Based on this work, we developed the company’s long-term investment strategy, aimed at the growth of the investment portfolio asset value and the reduction of the negative impact of high volatility and uncertainty at the stock markets.  

Currently, we have rebalanced our portfolio assets by reducing our positions on some of the most volatile, and thus risky, investments. At the same time, it should be mentioned that we have kept our positions in the American shale gas producers, such as Southwestern Energy Co. and Gulfport Energy Corp., despite their rather high volatility, as they represent a strategic long-term investment.

Before we start reviewing last month’s main events at the global markets, we would like to draw your attention to the fact that in the nearest future we are going to transfer the WellMax Premium model portfolio to a new brokerage account. We will therefore be able to access a wider range of investment instruments, which, in turn, will undoubtedly contribute to the growth of the WellMax Premium yield.

This is evident from the fact that the WellMax portfolio has already been using the above-mentioned instruments for a while in 2018 to achieve higher returns. Thus, in 2017, the WellMax portfolio average monthly yield amounted to1.04%, whereas over the first four months of 2018, the WellMax portfolio yielded 1.15% on average.

The fewer dollars there are – the higher the value of a dollar is

Significant strengthening of the US dollar at the global currency market was one of last month’s major economic events. After a long period of decline, observed since late 2016, and the consolidation in the first quarter of 2018, the US dollar index went up rapidly in April 2018, as illustrated on the chart below (source: Yahoo Finance). 

The dollar showed the highest increase in value against the currencies of the developing countries, such as the Argentine peso, the Brazilian real, and the Turkish lira, which can be seen on the chart below (source: Yahoo Finance).

At the same time, it should be noted that we predicted the main reason for the growth of the US currency, as well as the increased pressure on the currencies of developing countries, as early as in 2017, as described in our annual review:

Thus, since the launch of the Fed’s balance sheet shrinkage, over the period from October, 2017, to May 22^nd, 2018, the Federal Reserve System has withdrawn over 123 billion USD from the system. Ultimately, this factor not only accounts for the USD growth in the global currency market, but (along with the Fed raising the interest rate) has also been the catalyst driving the growth of the US Treasuries’ yield, leading to volatility in the stock market. At the same time, as mentioned above, with the shrinkage going on and dollar liquidity withdrawing from the market, the currencies of developing economies, as well as the stock market, will continue to experience more and more pressure. Besides, the above-mentioned processes will negatively affect the developing countries’ assets’ price in dollars, including real estate. 

The Euro was also affected by the strengthening of USD. Its exchange rate is currently at the lowest level since July, 2017, having over the last 5 weeks lost almost all the value it had gained in the second half of 2017. The Euro’s downward spiral can be explained by the compressed spring effect. For a long time, the media has been dominated by the speculative news (reshuffling in the President’s Administration, possibility of a global trade war, etc.), whereas the real fundamental factors, which were pointing to the dollar being undervalued, went unnoticed. We mentioned those as early as March, 2018, before April’s rally in the currency market:

At the moment we are observing the reverse situation: the media scene is dominated by the news of the pressure that the Fed’s policy has been putting on the developing markets, and the ongoing problems in those, as well as the weak Euro, and the European Central Bank’s unclear policy. At the same time, such real fundamental factors as the US huge budget and trade deficits, the rapid growth of the national debt, and so on, have disappeared from the news agenda. 

Furthermore, the Trump Administration’s policy remains highly impulsive, which is evident from the recent example of the US – North Korea summit. Trump managed to change his mind about it several times in the course of one week. Another example is the decision to impose a 25% tariff on a range of products exported from China, made just one week after the American and Chinese representatives finally reached the agreement in their negotiations to cease the “trade war”. In our February review, we also mentioned that the toughening of the Fed’s monetary policy 

At the same time, the political crisis in Italy, where President Sergio Mattarella is locked in a stand-off with the “The Five Star Movement” populist political party, has been putting even more pressure on the Euro. Italy has had no functioning government since March 4^th, the day of the parliamentary elections, when none of the opposing political blocks were able to achieve a clear victory. Since the President has rejected the Eurosceptic economist Paolo Savona as a candidate for the position of a Minister of Finance, there seems to be no other way out of the deadlock, except early parliamentary election in the late July, which, experts fear, may strengthen the positions of the “Italexit” advocates. Despite the fact that the scenario, in which Italy leaves the currency union, seems highly improbable, we cannot exclude such outcome. Italy’s political crisis, which may turn into a financial one, particularly concerns investors, and consequently puts further pressure on the Euro. This scenario seems to be quite likely, considering the country’s current debts.   

Last month, despite the rapid strengthening of the US currency, oil continued its record high growth, reaching 80 USD/Brent barrel.

Rising geopolitical tension in the Middle East (particularly, the escalation of the conflict between the USA and Russia following the air strikes in Syria, as well as the US withdrawal from the Iran nuclear deal), was the main factor driving the rapid growth of oil prices.

At the same time, aside from the speculative component, a number of fundamental supportive factors have also contributed to the price surge. The first one was the continuing decrease in oil production in Venezuela and Angola. The former is facing an economic crisis and lack of oil sector investments due to the US sanctions. According to experts, the latter is suffering a natural decrease in the production of offshore wells, also coming as a result of insufficient investment into the sector. 

However, it needs to be mentioned that U.S. growing oil production more than offsets these losses. According to the latest data from the U.S. Department of Energy, the country’s oil production had increased to 10.769 million bpd over the week ending on May 25^th, which can be seen on the chart below.

Overall, since the beginning of 2018, the oil production in the U.S. has increased by almost 1 million bpd, from 9.782 million bpd to 10.769 million bpd. It should be also noted that if the U.S. keep the current pace of oil production, the country is very likely to outdo Russia in terms of oil production in the second half of 2018, and to become the world’s largest oil producer.

The factor that could prevent this outcome, is also the reason for a significant oil price setback of the late May from its previous record-high figures. On Friday, May 25^th, in his interview with Bloomberg at the St. Petersburg International Economic Forum, Khalid A. Al-Falih, Saudi Arabia’s Oil Minister, announced that his country was considering the possibility of changes to the OPEC+ agreement following the changes in the oil market. According to him, Saudi Arabia suggested that participants of the agreement begin gradually increasing their oil supply starting from the second half of 2018. It is worth mentioning that if the oil production increase is contingent on the U.S. imposing sanctions on Iran’s oil imports, this decision will contribute to the stabilization of the oil market. Otherwise, the oil market may return from the point of balance/small deficit, to oil surplus on the global market, especially as the global economic slowdown is likely in the medium term. 

Last month’s dynamics of the ruble exchange rate may seem puzzling to the observers, especially combined with the growing oil prices. However, there is nothing unusual in such behavior of the Russian national currency. 

The oil price, which has gone up recently, was merely a factor keeping the ruble from a deeper dive. At the same time, we had outlined most of the factors exerting pressure on the ruble in our previous economic reviews.

Unprecedented toughening of the U.S. sanctions was the main reason of the ruble’s fall. On April 6^th, the U.S. Department of the Treasurypublished the sanction list of Russian businessmen, high-ranking officials, and companies, subject to the restrictive measures within the framework of the Countering America's Adversaries Through Sanctions Act. This not only heralded a whole new level of sanctions, but also showed that the USA are capable of and ready to take out entire Russian companies, and, in essence, industries (as RUSAL enterprises produce almost all of Russian aluminum) from the global production chains.  

Despite the fact that the USA have agreed to some loosening of the sanctions against RUSAL, in light of the new sanctions foreign investors have even less incentive to bring their money to the Russian market, especially considering the gradual narrowing of the gap between the interest rates of Russia’s Central Bank and the U.S. Federal Reserve System, as well as the growing yield of American bonds. This is evidenced by the unsuccessful outcome of the auction on May 16^th, where the Russian Ministry of Finance only managed to sell 21.4 billion rubles’ worth of bonds, of the total 30 billion rubles offered.

It should also be noted that the taxation period, which has been one of the key factors supporting the Russian Ruble, ended on May 28^th with the profit taxes paid. At the same time, the Ruble continues to experience pressure from the Russian Ministry of Finance’s purchase of foreign currencies in the domestic market. The Ministry is planning a five-time increase of the volume of such purchases due to the growing oil price and the resulting increase of the state budget, which is largely dependent on the income from the oil and gas industries. Besides, the ruble is under pressure from external factors mentioned above: the U.S. dollar’s global strengthening and investors leaving the developing markets.

It is likely that the FIFA World Cup, set to take place in Russia, will strengthen the Russian currency in the short term, as a lot of foreign football fans will come to Russia, spiking the demand for the local currency. However, in our opinion, in the long term the Russian Ruble is going to experience even more external and internal pressure, which may result in further weakening of the exchange rate.

In the near future, we are looking at an eventful and turbulent period: the U.S.-North Korea Summit on June 12^th in Singapore; OPEC+ meeting of ministers of the participating countries on June 21^st – 22^nd in Vienna (gradual growth of oil production may be discussed there); the FRS meeting on June 12^th – 13^th, etc.

A period, which will demand from the market participants to make rapid investment decisions, based on a deep and accurate analysis, i.e. the very competencies that have always been the strong suit of the International Financial Community team.

Yours faithfully,

IFC team