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Mehran Nakhjavani's  Instablog

Mehran Nakhjavani
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Mehran Nakhjavani is a partner at MRB Partners. He formerly managed global and emerging market equity portfolios for 10 years for the asset management division of a major Swiss bank. Prior to running money, his career was in independent investment research: for 8 years covering emerging market... More
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  • Chinese Property: Not This Year's Problem

    The commentary on Chinese property could not be gloomier. The mother of all short trades is riding on a story of overbuild and bubbles. Unfortunately for the shorts, the facts are inconvenient. Chinese property stocks are set to outperform in the year ahead.

    The bear case is that house prices have started to decelerate as the rate of growth of shadow financing has been squeezed. This is supposed to trigger a crash in property values, with developers left holding excess inventory and unable to service their debts.

    However, the relative performance of Chinese property stocks has an inverse relationship with the ratio of housing starts to completions. When starts rise faster than completions, developers are squeezed for cash and they tend to underperform, as was the case last year. Now, the number of housing completions is rising faster than starts, which suggests that the property developers' cash positions are improving, and, in turn, they will start outperforming the Chinese stock market.

    Chinese property stocks performance

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 26 4:28 PM | Link | Comment!
  • Oil Price Risks Are Skewed To The Downside

    Plentiful oil supply trumps improving demand. That long-standing truth is once again being confirmed by the market. The implication is that the risks to oil prices are skewed to the downside.

    There are two sources of demand for crude oil: the bigger portion is from emerging markets, where rapid demand growth is driven by powerful secular and demographic drivers. The smaller portion is from the OECD, where demand is fickle and cyclical. Because it is volatile, it tends to drive oil prices, i.e. rising OECD demand typically drives up prices.

    But OECD demand has been rising, and prices have not reacted. Why? Because oil supply is booming, thanks entirely to growing output outside OPEC, in particular in North America.

    Oil supply and demand

    OPEC output didn't decline as a result of a cabal of oil ministers plotting over their Viennese Apfelstrudel. It is the result of the vagaries of domestic politics in Iraq and Libya and of sanctions on Iran. These are not permanent factors, and have a predictable end to them. When that happens, the oil market will be oversupplied.

    Why? Because nobody will "make room" for the three OPEC suppliers to get back into the market. The North American shale and tight oil boom will continue (given what we know about capex commitments) and the Saudis and other Gulf Arab producers have their own budgetary requirements to meet.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: USO, DBO, OIL, BNO, OLO, Crude oil
    May 09 12:55 PM | Link | Comment!
  • El NiƱo Crimps The EM Consumption Story

    If economists indeed only exist to improve weather forecasters' self esteem, then EM economists will soon be wracked by self-doubt as they digest NOAA's 2014 El Niño forecast. It's looks like it's going to be a "big one", as bad as the 1997-98 episode, which can only mean higher food prices in the year ahead. And higher food prices means one of two EM policy responses: higher spending on food subsidies, or tighter monetary policy. Neither of those responses are equity-friendly.

    More than a third of the EM consumption basket comprises food, so EM policymakers have to be concerned with El Niño's impact on inflation (India's RBI devoted a paragraph of its April Monetary Policy Statement to El Niño, because the latter is associated with a poor monsoon season).

    The immediate investment implications are in the commodity pits, and in assets directly associated with food exporters and importers. But there is a less immediately obvious call to be made: discretionary spending in EM economies acts as the inverse of food prices. When food costs more, EM households have less to spend on everything else. Investors have been bidding up the price of any asset associated with the trend towards more EM consumption in recent years, with consumer staples and discretionary stocks among the most expensive in the EM universe.

    El Niño could be the perfect storm for unwinding some of those excess valuations if earnings growth fail to deliver on stellar expectations this year.

    El Niño, CRB food prices, and EM consumption

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 14 3:35 PM | Link | Comment!
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