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 December 2018, the value of assets of the WellMax investment portfolio increased by 1.02% in USD and EUR, which is equivalent to 12.95% per annum with monthly compounded interest. There was a 15.08% yield per annum in rubles and a 12.28% yield per annum in yuans with monthly compounded interest.

Due to the sharp increase in volatility in the world’s stock and commodity markets in the late 2018, last month the WellMax Premium portfolio also showed a slight drop. Over the period from November 10, 2018, to December 10, 2018, the value of assets of this investment portfolio decreased by 1.8% in USD.

At the same time, it should be mentioned that this result significantly outperformed the broad market dynamics. Over the same period (from November 10, 2018, to December 10, 2018), the main US stock market indices Nasdaq Composite and the Dow Jones Industrial Average fell by 5.15%, 5.25%, and 6.03%, respectively.

The US stock sell-off trend increased even further towards the end of the current year. In the second half of December, not only did the main US stock market indices drop below the March rate, the lowest one of 2018, but they also ended up in the red compared to the last year’s closing rate, as can be seen on the chart below (source: Yahoo Finance).

It should also be mentioned that the ongoing stock market crash is likely to lead to a massive reevaluation of entire groups of assets. In our opinion, the current volatility is going to stay in the market in 2019. This may encourage investors to sell the stocks of high-tech companies (especially of those yielding no profit while maintaining a high level of debt, which is getting more and more burdensome due to the rising interest rates), and instead put their capital into short-term bonds and stocks of those companies that, despite not having innovative products, continue delivering strong and stable financial performance, and paying dividends to their shareholders.

As we had forecast it in the previous economic review, the euro’s exchange rate against the US dollar has been experiencing pressure from the fundamental factors mentioned earlier. As a result, the euro’s exchange rate consolidated within the narrow price band of 1.13-1.15.

At the moment of writing of this economic review (December 20), the EURUSD currency pair is being traded close to the upper limit of aforementioned price band, which is caused by the slight easing of the Fed’s policy.

This refers to the Federal Open Market Committee Meeting held the previous day. According to the results of the meeting, the Fed increased the base rate by 0.25%, while also announcing two upcoming rises next year (instead of the three rises announced earlier). Despite both of these decisions being predictable (forecast in our telegram-channel as early as in mid-November), a slight weakening of the US dollar against the euro is a natural consequence of the Fed’s changing rhetoric.

At the same time, it should be mentioned that, despite the Fed’s decision to slow down the pace of growth of the base rate in 2019, the principal factor maintaining the dollar is still in play. It is the divergence between the policies of the ECB and the Fed, the world’s two main central banks:

• Dollar liquidity withdrawal against the issue of the euro
• Record-breaking borrowing rate differential between USD and EUR
• And others

Furthermore, the euro has been experiencing additional pressure from the current situation in France. As you probably already know, not only did the large-scale protest movement force the French Government to cancel the fuel price hike scheduled for January 1^st, but it also forced the French President Emmanuel Macron to address the nation on TV and declare an economic and social state of emergency, along with a number of social support measures, such as:

• The €100 minimum wage increase starting January 1st, 2019
• Tax exemptions for bonuses paid by employers at the year-end
• Abolition of the mandatory social security charges for the retired citizens with income of under €2,000

It is worth mentioning that the declared measures will inevitably result in growing budget spending and budget deficit. This may jeopardise France’s ability to comply with one of the main requirements of the EU, the cap on budget deficit (a maximum of 3% of the GDP). The likely increase in contradictions among the member countries of the monetary union regarding their national budgeting may adversely affect the Common European Currency. For instance, in our previous economic review we wrote about the Italian budgeting problem. The Italian Government headed by populists had to reduce the country’s budget spending due to pressure from Brussels. France’s growing budget deficit may set a dangerous precedent, which may be used by Rome and other European capitals for growing their budget expenditures. We described the Italian budget issue in detail in our previous review, so you already know the possible outcome of Italy’s growing budget spending for both Italian and European economies.

Thus, France’s current situation is a strong risk factor for the euro, and the outcome is unpredictable. It should also be mentioned that when it comes to the social spending-to-GDP ratio (which includes monetary benefits, direct provision of goods and services, as well as tax exemptions for social purposes), France is the leader among the OECD member countries.

At the same time, the US dollar is facing a significant risk coming from the inability of President Trump and the US Congress to reach a compromise regarding Trump’s intention to build US-Mexico border wall. This disagreement may result in the US federal government shutdown as soon as on December 21^st.

The oil market also showed sharp price fluctuations over the last month. Despite the OPEC+ deal extension, the strongest downward trend since 2014 continued in the market.

The main reason of the record-breaking drop in the price of oil is the high volume of oil production in the US. Despite the plummeting oil price, the US oil production remains at a record high of  10.6-10.7 million bpd, which can be seen on the chart below (source: EIA).

However, it should be mentioned that the current price of 45-46 USD/WTI barrel is near the breakeven point for the US shale oil producers, as can be seen on the graph below (source: Goldman Sachs Global Investment Research).

Should the oil price continue to fall, this may result in the recurrence of the 2015 scenario, when American producers began to operate at a loss after the oil quotations plummeted in the late 2014/early 2015. This led to a significant decrease in oil production in the US, followed by a renewed growth in the oil price. 

Over the last months, the oil price has also been experiencing pressure from a large-scale sell-off in the world’s stock markets, as well as the reinvestment of capitals from risky assets (oil being one of them) to risk-free ones. Thus, the oil price may continue its downward trend due to the growing concern of investors worldwide caused by the dollar liquidity cut, the possibility of trade war restart, and the global economic slowdown expected in 2019.

Last month’s ruble dynamics corresponded to the forecast from our previous economic review. 

As we had forecast, the Russian ruble experienced pressure from a number of fundamental factors, such as:

• Negative dynamics in the oil market (the government benefits from the ruble’s weakening, as this helps to keep the budget’s balance)
• Central Bank’s decision to restart the purchase of foreign currency for the Ministry of Finance in January 2019 (the CB’s decision to cease the purchases of foreign currency in August, 2018, was the main factor maintaining the ruble)
• Possibility of new sanctions (related to the ‘Skripal’ case, the Kerch strait incident, etc.)
• Possible aggravation of the current situation in Donbass (recently the mass media has been giving extensive coverage to the buildup of military forces along the both sides of the  demarcation line)
• Overall negative situation in the developing markets
• Seasonal weakening of the ruble, which is typical for the year-end

Considering the highly nervous and changeable situation in the world’s financial markets, the record oil drop, lasting trade disagreement between China and the USA, we are about to enter a highly volatile period. The growing uncertainty and volatility of the world’s financial markets provide more opportunities for our clients and us, since the skill to analyze the news cycle and the ability to make swift investment decisions have always been the strong suit of the International Financial Community team.

Faithfully yours,

IFC team