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 February 2019, the value of assets of the WellMax investment portfolio increased by 1.12% in USD and EUR, which is equivalent to 14.3% per annum with monthly compounded interest. There was a 16.89% yield per annum in rubles and a 12.4% yield per annum in yuans with monthly compounded interest.

Last month, the WellMax Premium portfolio also showed a significant growth: over the period from January 10, 2019, to February 10, 2019, the value of assets of this investment portfolio increased by 4.86% in USD.

The late 2018 massive sell-off trend in the world's financial market gave place to the investors' growing appetite for risk in 2019. This change resulted in the dramatic growth of quotations of the main stock market indices, both in the USA and in other countries (source: Bloomberg).

This growth is predicated by two main reasons: the US Fed's changing rhetoric, and the US officials reporting on successful progress of the negotiations with China.

In the late 2018, the US stock market had dropped by 20%, which served as one of the main factors pushing the Fed to ease the country's monetary policy.

As early as in the late November (before the main December sell-off wave in the US stock market), the Chairman of the Federal Reserve Jerome Powell declared the actual interest rates to be close to a neutral level, which investors took as a sign of readiness from the Fed Chairman to slow down the pace of the rate growth. Following the December market crash, the Fed Chairman softened his position even more: as early as first days of January, Jerome Powell said that “the Federal Reserve has no preset policy path [for interest rates]. We will be paying very close attention to what incoming economic and financial data are telling us.”  According to Powell, the Fed will be adjusting all of the monetary policy instruments and change its approach to the balance sheet shrinkage, if necessary.

Powell's declaration convinced the market participants that the current cycle of toughening of the monetary policy was "running idle", if not terminated. It was the Federal Reserve's increase in the base rate, along with the growing withdrawal of dollar liquidity from the market (i.e. the Fed's balance sheet shrinkage) that served as the initial reason for the stock market crash (to which we had made numerous references in our previous reviews). Thus, the Fed's changing rhetoric, along with Fed officials "hinting" at the possibility of the Federal Reserve softening its monetary policy in case of continued massive sell-off, brought back the investors’ appetite for risky assets.

The second crucial reason for the ongoing growth in the stock market (especially in China) is the investors’ growing optimism regarding the outcome of the trade negotiations between the US and China. First and foremost, positive expectations of the market participants, expressed in the dramatically growing stocks of American and Chinese companies, come as reaction to the US officials' optimistic announcements, stating some progress of the negotiation process, as well as the readiness of the US, should it be necessary, to extend the deadline for settling trade disagreements (currently due to expire on the 1st of March).

As before, we think it is highly unlikely that a long-term trade consensus can be reached, with Trump needing a close to parity trade balance in order to keep his campaign promises (and be subsequently re-elected in 2020), and China needing a growing export to maintain its pace of economic growth. It is most likely that the overt trade conflict,started between the US and China in 2017, will be of a long-term nature and will last for many years. However, currently, the prolongation of the technical "truce", or coordination of short-term trade arrangements designed to reassure the financial markets, appear as a realistic scenario for the future development of the situation.

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 is traded within the price band of 1.12-1.155, which we had outlined earlier.

The main reason of the ongoing weakening of the euro against the US dollar is the extremely poor macroeconomic indices of the Eurozone:

- the pace of the GDP growth in the currency bloc countries has been slowing down for five quarters in a row (the GDP growth amounted to 1.2% in the fourth quarter of 2018, against 2.7% in the fourth quarter of 2017);

- the volume of industrial production in the Eurozone fell by 4.2% YoY in December, following a significant drop in November (-3% YoY);

- the European Commission sharply cut its forecast of economic growth in the Eurozone countries for 2019 (from 1.9% of the GDP growth expected in November to 1.3% in its February forecast).

Besides, the euro is also experiencing pressure from the continuous Brexit-related uncertainty, ongoing anti-government demonstrations in France, worsening economic prospects of Italy following the ECB ending quantitative easing, etc.

It is the Fed's softened rhetoric that is preventing the euro from further devaluation. As we mentioned in our previous economic reviews, it was the divergence between the policies of the Fed and the ECB, the world's two leading central banks, that provided most support for the dollar. At the same time, changing rhetoric does not mean changing policies. The Federal Reserve is proceeding with monthly withdrawals of dollar liquidity from the market, which results in the respective strengthening of the US dollar.

In its turn, the oil price has been moderately rising since the early 2019, gradually regaining its value after the dramatic crash in the fourth quarter of 2018.

Normalization of the situation in the oil market comes from a significant decrease in the global oil supply in January. According to the International Energy Agency (IEA), this figure amounted to 1.4 million bpd from the rate observed in December 2018.

Another long-term supporting factor for the oil price is the decision by the government of Alberta, Canada, where most of the country’s oil is produced, to introduce a limitation starting January 1st, 2019, which obliges the producers to cut oil production by almost 9%, or by 325 thousand bpd, for the period of one year. This measure is aimed at raising the plummeted price of Western Canadian Select, the local oil brand.

However, the main production cut took place in the OPEC countries (including Iran, Libya, and Venezuela, not participating in the deal). According to the IEA data, in January, these countries decreased production by 930 thousand bpd. In their turn, the 11 OPEC countries, being participants of the 6-month production cut deal, partially made good on their commitment (86%), decreasing production by approximately 700 thousand bpd. The further oil price growth is hindered by the poor fulfilment of obligations under the deal by the countries that are not part of the cartel (mainly Russia). According to the IEA data, in January, non-OPEC countries fulfilled their obligations of reducing the production by 25% only, with Russia fulfilling its obligations by 18% only.

The moderate growth of the oil price over the last several weeks has also been caused by the possibility of renewal of the trade war between the USA and China in case of failure of the negotiations, sharp economic slowdown in Europe, US President's verbal interventions, and rich oil stocks/high level of oil production in the US.

After 4 months of calm, sanction-related risks have returned to the Russian currency and stock markets as the main factor defining market changes.

On February 13, 2019, Democratic Senator Bob Menendez and Republican Senator Lindsey Graham, the authors of the tough2018’s anti-Russian sanctions, presented their updated, even tougher version. If the sanctions bill passes the US Congress, the new sanctions will affect:

·       Russian banking sector

·       New issues of Russian government bonds

·       Russian energy sector

·       Private persons from the Russia’s President’s circle

There is no doubt that the risk of Russia’s banking sector being hit by sanctions will adversely affect the exchange rate of the Russian ruble and the value of ruble-nominated assets. At the same time, despite the risk of introduction of new tough anti-Russian sanctions, Russian stock market (and the ruble, subsequently) is significantly supported by the high dividend yields of Russian companies, as well as their undervaluation by a number of multipliers, when compared with their counterparts from other developing markets. This continues to make them attractive for foreign investors.

A few words about gold...

Since the late 2018, the gold price has been steadily growing in the stock market, gradually approaching the important resistance level of 1,350 USD/1 XAU. This price dynamics is mostly caused by growing concerns in the market (related to the possibility of continuation of the trade war/imminent European recession /escalation of geopolitical tension/etc.). These concerns heighten investors' interest in gold as a hedging asset. Another significant factor supporting the gold price is an extremely high demand for this asset on the part of central banks, which prefer to increase the share of this precious metal in their gold and foreign currency reserves in the current political and economic situation.

At the same time, we do not consider investing in gold (especially in physical form) to be an optimal asset for capital growth by private investors due to the intricacies of storage and taxation typical for such investments.

The entire financial world is standing still waiting for the outcome of the trade negotiations between the US and China. It is this outcome that will define whether the stock market will continue to grow, or if the quotations will plummet to a new minimum. The market volatility has increased even further due to a conflict on the border of two nuclear states (India and Pakistan), as well as due to Trump's former lawyer testifying against him in the Senate, which can undermine US President's position again and adversely affect the country's political stability. At the same time, despite the highly changeable situation, the IFC team has market strategies developed as a result of months of analytical work, suitable for all possible market scenarios, as well as a set of investment tools necessary for implementing these strategies. 

Sincerely yours,

IFC team