Tags: investors | economy | Political Credibility | china

Investment Decisions Could Become Really Complicated

Wednesday, 15 July 2015 11:52 AM Current | Bio | Archive

Long-term investors face complicated times as these days it’s mostly all about “political credibility,” be it related to growth in China, the Iran nuclear deal or the so-called EU-Greece deal.

On China, interestingly the Chinese National Statistics Bureau spokesperson considered it necessary to state that the good Chinese GDP growth number for Q2 that came in at 7 percent (which was the same as for Q1) was “not overestimated.”

Whatever anybody might think about it, Chinese investors did seem to take the “good” news seriously and therefore apparently dumped stocks (yes, these are abnormal times!). This was is reflected in the Shanghai Composite index's drop of 3.02 percent, with more than 400 companies falling between 9.9 and 10 percent — the downward limit on that exchange.

The Shenzhen composite index was also down by 4.22 percent.

On the Iran nuclear deal, it’s once again all about political credibility.

On page 6 of the Iran nuclear deal document we read: “… 2. Iran will begin phasing out its IR-1 centrifuges in 10 years. During this period, Iran will keep its enrichment capacity at Natanz at up to a total installed uranium enrichment capacity of 5060 IR-1 centrifuges. Excess centrifuges and enrichment-related infrastructure at Natanz will be stored under IAEA continuous monitoring, as specified in Annex I…”

We should ask ourselves: When someone is serious about phasing out an activity, why should that someone keep the excess related materials and infrastructure at the production site for years to come?

There is no doubt when everything will be ratified by all the related parties, there will be a lot of business opportunities in Iran.

The big question will become if Iran will live up to its political promises.

On the EU-Greece deal, and with what we have learned on Tuesday thanks to a 4-page “secret” IMF staff update on Greece’s preliminary public debt sustainability analysis (which was seen by all the EU-Greece deal architects over the weekend),  we could ask ourselves how much EU credibility is left after the EU proposed Greece an “un-doable” deal.

Now, that IMF document has many interesting readings: “… Greece’s public debt has become highly unsustainable … The financing need through end-2018 is now estimated at Euro 85 billion and debt is expected to peak at close to 200 percent of GDP in the next two years, provided that there is an early agreement on a program. Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far … The preliminary (mutually agreed) assessment of the three institutions is that total financing need through end-2018 will increase to Euro 85 billion … The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date—and what has been proposed by the ESM…”

Long-term investors should take notice of what’s going on with the IMF, one of the three institutions that are involved in managing the rescue of Greece.

It's a fact, the IMF has given clear warnings “in time,” but its warnings have not been taken into account. Therefore it should not come as a surprise if the IMF at some time in the future could walk away from the whole EU-Greece mess.

No doubt, if that were to happen this could provoke an unpleasant, and to many fully unexpected, shock in various markets.

Anyway, the EU project has lost, thanks to this latest Greece deal mess, an important chunk of its “political credibility.”

Again, for long-term investors these are not easy times.

There should be no doubt, but understanding political risks will become increasingly a driver of median- to long-term investments.

Believe me, investment decisions could become really complicated.

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Long-term investors face complicated times as these days it's mostly all about "political credibility," be it related to growth in China, the Iran nuclear deal or the so-called EU-Greece deal.
investors, economy, Political Credibility, china
Wednesday, 15 July 2015 11:52 AM
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