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Across the Spectrum - 26th May 2009

The drop in the London interbank offered rate (Libor), the benchmark for USD 360 trillion of financial products, to a record low, masks a growing gap between the rates that the biggest banks charge each other for credit. The difference between the highest and lowest interest rates banks say they pay for three-month dollar-denominated loans is near the widest this year, according to data compiled by the British Bankers' Association. The spread signals that lenders still lack confidence in each other, even though measures ranging from the so-called Libor-OIS spread to corporate bond sales show credit markets have recovered from the freeze caused by the collapse of Lehman Brothers last year. "It's premature to judge that the credit meltdown is fully over," said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd, a unit of Japan's largest bank. "Banks remain wary of extending credit to each other due to strenuous concerns about counterparty risk."

Libor fell to 0.66% last week from 4.82% on 10 October. At the same time, the gap between the highest and lowest accepted quotes reported by 16 banks that contribute to the London-based BBA for its calculation of Libor has averaged 7.6 basis points in May, according to Citigroup Inc. That's up from 4.9 basis points in April and 1.5 basis points in the six months before Lehman's bankruptcy. It widened to 9 basis points on 14 May, the most since 13 December. "The dispersion of Libor submissions seems to be exceptionally wide," said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co in New York. "There is potential for bifurcation of the financial system between the banks perceived to be healthier than others."

Neptune's founder and manager of the Neptune Russia & Greater Russia fund, Robin Geffen, maintains the view that Russia is the Bric country with the most potential. He believes the move upwards in the oil price above USD 55 a barrel is beneficial for Russia's macro picture, while the government's quick action in getting liquidity back through the system is proving highly successful. He said, "The response by Russia's government was faster than the UK or the US, which is really paying off. Russia's employment levels have also stayed high so there has been no cut in consumer spending as a result of the credit crunch. What also makes the country look attractive is that most people expect China will have a V-shaped recovery. With Russia as its next door neighbour, it could be a major beneficiary of that. To make the case even stronger, commodity prices appear to have bottomed out in a number of places, which is again very positive for the Russian stock market."

India's decisive election result should speed up economic reform, says Hugh Young, managing director of Aberdeen Asset Management Asia. Young points out that India's economy has not been immune from the effects of the global economic troubles, but has so far weathered it better than most. "Growth is likely to fall to around 4% this year from around 8% in 2008, but in the context of conditions elsewhere is impressive", he says. Compared to most other emerging countries, he points out, India's economy is more domestically orientated. "Its export sector is more related to provision of services, such as call centres and software, than it is to the manufacture of goods, demand for which has been so badly battered. Furthermore, India's manufactured goods are in defensive areas such as pharmaceuticals, rather than more vulnerable sectors like consumer electronics and cars. Overall, we expect India's growth to hold up reasonably well, and think that its stockmarket presents good long-term investment potential at current levels."

The British pound rose, surpassing USD 1.60 for the first time in almost seven months, as optimism the worst of the financial crisis is over stoked demand for assets denominated in the currency. The pound rallied versus the euro as the FTSE 350 Banks Index advanced 2.2.%. The yen fell against higher-yielding currencies such as the Brazilian real and Australian dollar as a rebound in US consumer confidence drove stocks higher. The pound rose as high as USD 1.6008 before trading at USD 1.5970 in London. It appreciated to 87.45 pence per euro, from 87.81 pence. The yen weakened to 95.35 per dollar, from 95.03 yen. Investors are betting the pound's 19% decline versus the dollar in the past 12 months may have left it cheap given the optimism over government stimulus packages pulling the world economy around.

Spotlight on Investing in Oil

This week future dated Brent crude oil climbed above USD 60 a barrel for the first time since November. Fund managers certainly seem to be looking more favourably at the energy sector and it is now the second most popular sector among institutional investors.

Alistair Syme at Nomura reckons the oil price is going to rise above inflation over the next two years, to USD 75 in 2011. He says share prices are not yet reflecting this. Keith Morris, analyst at Evolution, cautions that the oil market is particularly difficult to follow at the moment as news on demand and supply is out of date as soon as it is published. But Morris sees oil averaging at around USD 50 this year and USD 70 thereafter.

So what are the alternatives for investing in oil?

Tim Cockerill, head of research at IFA Rowan PLC, says one of the easiest ways to invest in oil is through an exchange traded fund or ETF. ETFs are basically a shared investment in a fund that tracks the underlying assets or index. An oil ETF simply reflects the underlying price of oil. Cockerill points out there are a number of ETFs based on the oil price which offer both dollar and sterling exposure to the oil price. ETFs also allow the investor to short oil, one of the few ways to benefit from falling oil prices, and some investors use the ETF to hedge their buy positions.

There are also a whole range of margin plays on the oil price, including spread bets and contracts for difference. David Morrison at GFT warns that while these offer a greater exposure for a much smaller pot of money, they also mean that the investor can end up owing much more than they originally put down. These investment tools can also be used to short the oil price.

One way of buying into the oil market is to buy shares. The oil majors remain one of the most reliable sources of income, with few commentators expecting BP or Shell to cut their dividends this year, as long as oil remains above USD 35-40 dollars a barrel. Nomura's Syme thinks that if his oil price assumptions are correct, then oil and gas integrated shares offer up to 30% upside, far more than the upside on the underlying commodity. Beyond the FTSE there are other options especially in London which attracts a majority of oil companies, providing exposure to many different kinds of projects throughout the world. Here the choice is largely between the oil services sector, which has been hit by low order books or the exploration and production sector, which often means investing in a high-risk business.

Given the specialist nature of the sector and the high levels of uncertainty, the investor may decide that not to buy shares directly and rely on the expertise of others to determine which stocks to choose. Rowan's Cockerill says there are a number of funds to choose from that offer exposure to the oil price through equity performance. "This way you are benefiting from a level of fund management, rather than relying on your own insights," says Cockerill. He suggests that if the investor is really bullish about the price of oil, they could buy both an ETF on the underlying oil price and put some money into a fund, though he cautions that the investors risk appetite and strength of commitment will be factors into how much they should invest in the oil sector. And he also warns that if the investor is considering increasing their exposure to oil, then they need to check out their existing investments. "Any UK funds will have some exposure to oil," he said. If the investor decided to put 5% of their assets into oil, they might find that through their full portfolio they actually have a much higher exposure, he explained.

The information set out herein has been obtained from various public sources and is published by way of information only. The Spectrum IFA Group can accept no liability of any sort in relation there to and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.


Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.


This information is only provided as a guide and, if you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.


If you have a question, want to arrange for a free financial review or just want further information I can be contacted on +33 (0)325461631, via my website
www.financialexpat.com or via e-mail steven.grover@spectrum-ifa.com  
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