As economic recovery worldwide confirms itself, it is expected that interest rates will gradually grow, putting downside pressure on prices of fixed income instruments. Bonds, which have been good performers in the past, are not currently the best pick for investment portfolios - save for Eurobonds acquired on margin.
Leading international analysts put the current opportunities in fixed income markets in simple terms: borrow short-term and lend long-term. It means that investors should use short-term credits, provided by their brokers at extremely favorable terms, and use those to acquire midterm bonds, which have significantly higher yields. In the Eurobond market such a strategy, when properly applied, can bring profits over 20 percent per annum.
One should understand that the U.S. Federal Reserve is not supposed to boost interest rates before autumn 2004, or even in the beginning of 2005. Until this time the above opportunities in fixed income can be successfully realized.
Our general recommendation for clients is to increase equity investments in European, Russian and U.S. stocks. We would especially stress opportunities in Russia, which experienced a major correction in stock prices in autumn 2003 and regained its huge growth potential. Presidential elections scheduled for spring 2004 are expected to provide additional drive to the market. For those willing to participate in the Russian market, Lateko Bank's top proposals for growth would be in the energy sector, which should be restructured in the near future. Strategic buying accompanying the restructuring process is expected to push Russian energy stocks further up. We also recommend local telecoms and government controlled oil sector enterprises, particularly local shares of Gazprom and preferred shares of Transneft.
Another investment opportunity is on the futures markets. It is commonly believed that the futures game is too risky to enter; nevertheless, the outcome proves to depend on the strategy applied and on the investment horizon. As we mentioned above, world interest rates are near historical lows, and it could be rational to bet on interest-rate growth in the long-term, which is both common sense and consensus market expectation. Leading world analysts also expect continued growth in the Euro currency exchange rate, with appreciation targets of 5 percent -10 percent in the coming months. We expect the euro to rise as high as 1.32 - 1.35 per dollar before a major correction toward 1.20. Then we expect the resumption of a major uptrend on this market, with targets near 1.40 euro per dollar by the end of year.
We also see some opportunities on commodities markets. Due to the low level of oil inventories in the world, current oil prices remain quite high, and OPEC production cuts have provided additional support to the market. Nevertheless, this situation will not last forever, and as the cold season comes to end prices should gradually go down to the levels of $26 - $27 per gallon of Brent. We would assume that now is a good time for oil producers to hedge their future production and for speculators to go short in the oil markets.
Finally, gold is often believed to be the most speculative of all commodities. Two factors are core for this market: inflation and real value of the U.S. dollar (the currency it is traded in). As the dollar is widely expected to depreciate, while inflation for the time being remains under strict control, we could expect gold prices to closely follow the U.S. dollar exchange-rate moves; we also expect uptrend to prevent on this market. The appreciation tendency should remain also in the markets of steel, copper, nickel and aluminum.
Taking into account the high margins when trading futures contracts, one could double investments in quite a short period with using as little as $10,000 - $15,000 as a minimum commitment.
Peteris Antropovs is head of the
investment division at LATEKO Bank.
