Showing posts with label Sovereign Wealth Funds. Show all posts
Showing posts with label Sovereign Wealth Funds. Show all posts

Thursday, December 20, 2007

Currencies, SWFs and our Stock Market

Currencies, SWFs and our Stock MarketSocialTwist Tell-a-Friend
Ashraf Laidi

I pretty much agree with Frank Barbera's outlook but not necessarily as bearish on the US Dollar in 2008. I think the Greenback will continue showing resiliency vs the British Pound, Kiwi and Aussie into mid Q2 before it starts to weaken again. Euro should start recovering after Q2.

As for our Stock Market, when you consider that the main catalysts to the recent gains were 1) Abu Dhabi buying part of Citi 2) rumors/hopes of aggressive Fed cuts 3) Bush rewriting legal contracts on mortgages, all of these factors fall under the "extraordinary items" category on which the ailing market cannot always count on. Unless of course, Arab Gulf SWFs, will alternate with Far Eastern SWFs every other week to announce new buyouts. The 2002 lows in stocks should come around by next summer.


Editors' Note: Ashraf Laidi will publish his 2008 outlook very soon.

Monday, August 13, 2007

Water (H2O)

Water (H2O)SocialTwist Tell-a-Friend
Sally Limantour

There is a wacky Broadway play called UrineTown that deals with the concept of water – or the lack of. The premise is as original as it is unpleasant – in a city suffering from unending drought, private bathrooms are outlawed. Everyone must pay crippling fees to use public latrines run by a monopolistic corporation. Those who cannot pay get dragged off to "Urinetown," a mysterious place from which they never return. Finally, one latrine manager leads the people in rebellion. The catch is that the ingĂ©nue he loves is the daughter of the corporation's greedy president.
Watching this play a few years ago had me think how crazy the world will get as water becomes a scarce commodity. In many parts of the world this is already a problem and as populations grow and industrialized economies develop water becomes more precious everyday.

Water Stress and Water Scarcity

In the water industry the terms, “water stress” and “water scarcity” are often used. These terms have to do with a country’s annual supply of renewable fresh water. A severe form is when a country’s annual supply of renewable fresh water falls to less than 1,000 cubic metres per person. Such countries can expect to experience chronic and widespread shortages of water that hinder their development. Many countries fall in this category and do not have the technology to access clean water.

Water Shortages

One of the best books written on the topic of water is called, When The Rivers Run Dry, by Fred Pearce. He drives home the point that we do not realize how much water we actually use on a daily basis. Between drinking, washing and flushing we use approximately 40 gallons a day. In some areas where sprinklers and swimming pools and others uses are higher it can be double. When we add in water usage that is needed for what we drink and eat the numbers are astounding. It now takes 11,000 litres to grow the feed for enough cows for a quarter-pound hamburger, and 25 bathtubs of water to produce a single T-shirt. As a result, at the World Water Week in Stockholm, the International Water Management Institute claimed that a quarter of the world’s population now lives in areas of ‘physical water shortage’.

In a report from the Global Water Partnership of Stockholm, Sweden, it was stated that $4.5 trillion is needed to be invested between 2000 and 2025 to improve the global infrastructure.
The reality is that more than one third of the world’s population lives in countries where consumption of drinking water exceeds available supplies. In China alone it is estimated that their water supplies can support 650 million people which is only half of its 1.2 billion population. China has 617 cities of which 300 have serious water shortages.

The Middle East imports 91% of its fresh water needs from other countries as Jordan, Israel and Saudi Arabia all suffer from water shortages and in Africa it is estimated that 2/3 of the population who live in rural areas lack an adequate water supply.

Here in the U.S. the 1,400 mile long Colorado River is at record low levels and a decade long drought is threatening drinking water supplies for major cities and irrigation for food production in the western part of the U.S.

Pollution

In addition to shortages pollution is a major problem in much of the developing world. In China you have a double whammy – both water scarcity and pollution. Not only are they threatening human health and development, but water problems also jeopardize China's economic plans. The impact of water pollution on human health and water shortages together has been valued at approximately U.S. $15.1 billion by Chinese sources.

The lack of resources and advanced technology are partially responsible for the slow progress in solving these problems.

Half of China's population (nearly 700 million people) consumes drinking water contaminated with animal and human waste that exceeds the applicable maximum permissible levels. Liver and stomach cancers in China are caused in part by water pollution. China has the highest liver and stomach cancer death rates in the world. Liver and stomach cancers are 3-7 times higher in polluted rural areas of China.

Increased Funding for Water Infrastructure

As water becomes more of a problem world wide you will see governments and the private sector increasing funds to fix the aging infrastructure as well as to develop technologies to clean and reuse water. As it stands now the global water market is estimated to be $365 billion while the U.S. market is $87 billion.

The investment demand for companies involved in water management and conservation will grow as the industry matures. The Environmental Protection Agency estimated that $140 billion will be needed in the next ten years just to meet the requirements of the Safe Drinking Water Act. Many in the industry feel this number is grossly underestimated.

The hot spots for growth in the water sector is in the replacement of aging water infrastructure in developed markets and the installation of basic water infrastructure in emerging markets. While the number of pure water plays has been reduced we are seeing large companies, like GE gobble up some of the water companies. GE has purchased Betz Dearborn a water treatment business and Zenon which makes advanced membranes for water purification, wastewater treatment and water reuse. The company pioneered the use of technology for water and wastewater treatment that is spreading rapidly throughout the world. GE is also building one of the largest desalinization plants in Algeria. The Danaher Corporation recently agreed to buy Centrist, a water treatment products and services provider and I foresee some of the large sovereign wealth funds (SWF) buying up water related companies in their need to provide their countries with clean water. As water becomes more scarce, tensions are likely to arise among different users within countries and also across borders. Companies operating in water-stressed regions will have to be aware that they are competing for an essential resource and will have to manage any potential flare ups.

So how can private investors tap into these markets? There are a number of ways and one play is to purchase the US Power Shares Water Resources or individual concentrated water funds, such as Aqua Terra Asset Fund, a relatively new water fund run by an environmental engineer. One can also go to the International Securities Exchange (ISE) where a water index is the basis for cash-settled index options (symbol, HHO), ETFs (symbol: FIW), and ETF options. Cash-settled futures on the index are coming soon.

There are also individual companies such as Aqua America or Calgon Carbon. Hyflux traded in Singapore is an interesting water company and recently bought into a business in Saudi Arabia which in addition to producing oil for export is also one of the world’s largest consumers of less expensive “used” oil. This is oil that has been collected from shipyards, power plants and other related industries. Hyflux owns a method that recycles the oil and they expect this aspect of their business to grow and equal their water technologies in terms of income.

The following are stocks and funds in the water sector that look attractive: American States Water (AWR), Aqua Terra Asset Fund (KWIAX), Aqua Water (WTR), Badger Meter (BMI), Calgon Carbon (CC), Clarcor Corporation (CLC), Hyflux (HYFXF), Insituform (INSU), Nalco (NLC), Pentair (PNR), Sinomem (SMMKF), Tetratech (TTEK), US PowerShares Water Resources (PHO) and Watts Water (WTS).

Monday, August 6, 2007

Sovereign Wealth Funds, Volatility and Markets

Sovereign Wealth Funds, Volatility and MarketsSocialTwist Tell-a-Friend
Sally Limantour

The recent correction in the stock market has many worried that liquidity will dry up as private equity deals diminish from their torrid pace. While this may be true the new darlings of investment – the “sovereign wealth funds” may pick up the slack. Sovereign wealth funds (SWF) are basically pools of money derived from a country's reserves and set aside for investment purposes that will benefit the country's economy and citizens. The funding for SWF comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources.

Government investment funds have been rising and China’s recent investment of $3 billion into Blackstone and the purchase of Barclay’s by the CDB (which also came with a board seat) shows how they want to develop their economies and will give China access to operations in emerging markets.

The numbers are staggering. For perspective it was only five years ago governments were sitting on $1.9 trillion in foreign currency reserves. This has grown to $5.4 trillion which is more than triple the amount in the world’s hedge funds. This excess cash is being moved into sovereign wealth funds and will change the landscape going forward.

A number of ramifications will emerge from SWF and currently concerns from protectionist measures to financial stability are being discussed. The US government has stated that the spread of sovereign wealth funds could create new risks for the international financial system.

One theme running through the SWF story is the idea that countries are diversifying from US dollars and placing their funds in other more tangible higher yielding investments. They want to diversify their holdings and this is not bullish for the US dollar. This adds to the move by other countries that are beginning to accept other currencies for purchases of oil and other products.

I have long held the view that we will see increased volatility in many asset classes going forward. The growth of SWF could be a factor in this as Mr. Lowery of the US Treasury has warned that SWF could fuel financial protectionism and has said “little is known about their investment policies, so that minor comment or rumors will increasingly cause volatility in markets.”

We all know markets do not like uncertainty and we are entering a period where “deep opaque pockets” will be making bigger and more ambitious purchases through state owned companies such as Gazprom and the China Development Bank (CDB).

My focus with regards to SWF is the natural resource sector. It is well known that China is basically resource poor and needs to import many of commodities to feed, house and mobilize their 1.2 billion people. With China set to move up the food chain it is only natural that they would use the SWF to secure their commodity needs by directly buying into companies that produce natural resources.

In a recent interview Marc Faber was stating that China will have to import most of their commodities and he looks at the price of coffee as an example and says, “If the Chinese just go to the per capita consumption level of say the Taiwanese or South Korean, they will take up the entire coffee crop of the world.”

As both China and India grow the demand for commodities will increase. The voracious appetite for commodities should continue and I would expect the next 5-10 years will see continued advances in many of the natural resource prices and the related stocks.

Water stocks, food, timber, mining and oil should continue their bull market and look for these SWF to move in this direction as well to secure their commodity needs for the future. Remember, 1 billion people currently use 2/3 of the world’s natural resources.
5.6 billion people use the other third. Meanwhile 3 billion are discovering capitalism and want “stuff.”

During this time while the stock market is taking some heat I am gathering my list of names in each sector and will share these with you going forward each week.

Water, oil and energy, food and metals are still in bull markets and I expect another leg higher in many of these will occur sooner than later.

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