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Oil price shock could re-rank emerging markets

Oil price shock could re-rank emerging markets

Investors focus on oil, geopolitics as protests shift; Russia, Kazakhstan, Venezuela seen gaining; Turkey, Chile, Israel look vulnerable.

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March 8, 2011 2:21 by



GROWTH CHALLENGED

Oil has risen $20 so far this year and a sustained price of $110 a barrel in 2011 would cut Turkish growth to 4 percent from expectations of 5.5 percent, according to Renaissance Capital.

Russia would grow at 5.5 percent instead of 4.9 percent and Nigeria at 9.6 percent instead of 7.6 percent, Renaissance added.

Turkish stocks have fallen 8 percent so far this year, while Russian stocks are up 12 percent.

Russian equity funds have absorbed fresh money for 14 weeks in a row, according to fund tracker EPFR, their longest inflow since the first quarter of 2008, at a time when global emerging market equity funds have suffered their longest outflow streak since Q3 2008.

The currencies of Russia and Kazakhstan have also been reaping the benefits, with both countries becoming increasingly flexible over trading bands in recent weeks, allowing their currencies to soar.

“Given the events in the Middle East, the possible appreciation in oil and the macro story, long rouble has been a consensus trade,” said Luis Costa, director, emerging markets FX strategy at Citi.

In Latin America, “the Venezuelan government is probably the biggest winner…the region’s biggest losers are consumers in Chile and Peru,” said analysts at Capital Economics in a client note, calculating Venezuela’s energy trade surplus at 20 percent of GDP, compared with an energy deficit in Chile of 6 percent.

Meanwhile, energy importer Israel is also under pressure from concern about a tougher peace-negotiating environment going forward, with the country’s debt insurance costs spiking to their highest in nearly two years following the fall of Egyptian President Hosni Mubarak.

“Israel is going to suffer the most from this change in the region,” Turker Hamzaoglu, MENA economist at BoA-ML, told a conference call.

“There is geopolitical risk…for the Arab-Israeli peace treaties.”

SAUDI NEXT?

The problem is that it is hard to see what happens from here, investors say.

If there are peaceful resolutions to many of the region’s conflicts, oil could fall, reversing current favoured positions.

Credit Suisse, for example, last week went overweight in Turkish stocks in an emerging Europe, Middle East and Africa portfolio, saying valuations had become attractive.

But with Facebook calls for protests in the world’s top oil exporter Saudi Arabia on March 11, oil could also rise extremely quickly, punching a hole in the global growth outlook.

“If you started to see pictures on your screens of unrest in Saudi, then for oil, name your price – $150, $200?” said Conway.

“Then the idea about which country you invest in — forget about it, you don’t want to be in the markets at all.”

(By Carolyn Cohn)



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