Euro/Dollar: How low can you go?

Government stimulation, Eurozone troubles and even China worries. Not a day goes by without speculation about how this will influence the Euro/Dollar exchange rate. The exchange rate is trading at $1.061, following a downward trend since 2014 and one might wonder where the bottom lies.

The exchange rate experiences the heaviest shocks if either the ECB or the FED has a press conference, but even mere speculation on implementations causes the exchange rate to react heavily as markets have trouble to make up their mind. A clue on whether the downward trend may continue can be found in the probabilities of central bank actions. A survey by The Economist finds that 92% of economists expect a rate hike in December. This still leaves some margin for the Euro/Dollar rate to drop even further. Of course, the exchange rate will also react to the actual amount of the rate hike, but overall, one might expect a drop in the exchange rate if the FED does indeed hike the rate.

And then there is the ECB. The ECB is thinking about extending and intensifying its Quantitative Easing (buying government bonds) and introducing a negative interest rate in December. Every day, the intensifying of QE becomes more probable which also pushes the Euro down. The realization of  the ECB plans could see the Euro drop sharply.

There remains some uncertainty about the underperforming European countries, which might cause trouble for the Eurozone as a whole. For example, a Grexit may cause other countries to leave the Eurozone as well, which harms Euro stability. This is another reason why European Central Bank stimulation is more likely than FED stimulation.

In effect, the stimuli by the FED creates a higher demand for dollars, while stimuli by the ECB creates Euro supply. These factors both drive the Euro/Dollar exchange rate down. As these stimuli are not yet implemented there is still some margin for the Euro/Dollar to go even lower. Since the probabilities, which are not 100%, are priced into the market, there will be some shock if new policy implementation will actually be announced and realized. The Euro/Dollar rate might well go below $1, even hitting $0.90.

December will see lots of action, one way or the other, from central banks. We expect the Euro/Dollar exchange rate to go even lower and we will probably see some downward shock within a month as a result of Central Bank policy making.

How to profit from El Niño; The sweet future of sugar

One of the first rules of investing is diversification across asset classes (as well as within asset classes). The exemplary well balanced portfolio should consist of stocks, bonds, commodities, real estate & currencies, just to name a few. But with interest rates at all-time lows, bonds are very unattractive and Real estate prices have already recovered substantially since the recent crisis. So one might look for chances in commodities.

Yet, the commodity segment is also facing hard times over the recent years. The Bloomberg Commodity Index lost more than half its value since 2011. The decline in oil weights heavily on this index, but also precious metals such as gold and silver lost significant value. So what are the opportunities in the commodity market? The answer is El Niño.

El Niño is an irregular recurring climate event, where ocean water temperatures in the Pacific Ocean near South America get unusually high. The effects of El Niño are immense as water in Western South America contains less nutrients due to warmer water. Moreover, it causes drought in Asia and Australia. And finally it also causes extremely heavy nonseasonal rains in South America. All these effects have a negative impact on agriculture as harvests fail (or at least harvests are worse than usual). Brazil (~40% of worldwide production), India (~18%), Thailand (~5%), Mexico (~3%), Colombia (~2%) & Indonesia (~2%) are all among the largest global producers of sugarcanes and these countries are all heavily affected by El Niño. As The US National Weather Service stated that this year's El Niño is on its way to become the biggest El Niño ever recorded (since 1950), we may expect that harvests will be bad, cutting sugar supply and driving sugar prices up.

Another trend that makes sugar an interesting investment is the growing ethanol fuel production in Brazil, worlds largest sugarcane producer. Sugarcanes can be used in the process of creating ethanol fuel and recently more sugarcane grinding mills in Brazil start to prefer ethanol over the production of sugar. As a larger part of sugarcanes is processed into ethanol instead of sugar, supply of sugar will go down, increasing the price of sugar.

The sugar price has been going down since 2011, but there are signs that the bottom has been reached as sugar prices recovered a little in September 2015. The recovery is an indication that the bottom might be reached, yet sugar is still trading at half its value from 2011. For that reason, we think it is sensible to step into the market while entry is still cheap and future prices look bright.

In conclusion, the effects of El Niño worldwide and Brazilian trends in the ethanol industry makes sugar related investments especially attractive as we expect sugar prices to rise.

ABN AMRO; go or no-go?

Tomorrow is the big day for ABN AMRO. After the bail-out in October 2008, ABN AMRO is now going back to the market again in an IPO ranging between 17-19 Euro. Which makes us wonder: did ABN AMRO overcome their problems? If so, what issues might still arise? Is it time to buy the stock during their IPO?

First, we note that ABN generates most of its revenues in The Netherlands, a staggering 80%. It is worth noting that the Dutch financial markets experienced stagnation since 2008. Yet, there is light at the end of the tunnel as the Dutch financial market is expected to grow with 2.4% next year. Moreover, the company reported a quarterly net profit increase of 13%, amounting €509 million. Second, the IPO premium seems on the low side compared to one of its major competitors, ING Bank, which is currently trading at 15% of its book value, whereas ABN is expected to trade for a premium of 6% of its book value. It would not be surprising if ABN reached this premium too if we take the fundamentals into account. Third, ABN is generous when it comes to dividend. After its IPO, ABN is planning to pay 50% of net income as dividends (up from 40%).

Yet, not all that glitters is gold. ABN engaged in some dubious interest-swap activities, where clients did not receive the proper instructions and explanations concerning these financial products. Recently, the verdict by a court in The Netherlands resulted in ABN paying back the money lost on interest-swaps by one client, a total sum of €2 million. This verdict may cause other victims to also issue a claim against ABN and could result in a total claim of €2.5 billion as estimated by Pieter Lakeman, specialist in financial market claims, which is not even the worst case scenario. There are also some long-term threats to keep an eye on. Companies like Apple and Google are entering pay-transaction markets, which increases competition and may harm profits for ABN in the long run. The innovative nature of these companies could mean that they are able to emerge in this market fairly quick and establish themselves well in a relatively short amount of time.

Overall, we consider this stock reasonably defensive as growth opportunities are present, but limited. Looking at competitors it seems to be a valuable investment, especially if dividends are taken into account. If you are a value investor, this stock is a definite buy.

Africa; A Goldmine Collapsing

Major export product

Almost 7 years after the financial crisis the African stock markets are back at their crisis levels. Since July 2014 the value of the Dow Jones Africa Titans 50 Index, the index investing in the 50 largest African companies, has nearly halved. One might wonder whether now is the right time to jump into the African frontier market again. To answer that question we'll take a look at the fundamentals of the African markets.

The African continent contains the most raw materials in the world. It is therefore no surprise that African economies are strongly dependent on the mining and exporting of these materials. All African countries, except for a few, even have a commodity as their most important export product. Moreover, these countries' exports is badly diversified. For example, iron ore amounts to 40% of total export of Mauritania and more than 94% of total exports of Angola is oil. These export numbers are also an indication of the African problem. If commodity prices rise, the African economies will flourish, if the opposite occurs, African economies are in trouble. So what's troubling? Commodity prices have been declining recently. Gold prices keep on falling and recent rate hike probabilities by the FED are likely to push the gold prices down further. The oil price also remains sluggish between 40-60 dollar a barrel. Moreover, the International Energy Agency prognoses 80 dollars a barrel, but only in 2020, thus recovery of the oil price seems far away.

Falling commodity prices are not the only reason why the African malaise is not over yet; this is where China joins in. African economies expose themselves heavily to China. For example, Zimbabwe, Zambia and Congo export respectively 33%, 43% and 53% of their total export to China. The cooling down of the Chinese economy, and with it the falling Chinese demand for resources, raw materials and other commodities, is thus creating major problems for the African export.