Restless Iraq and Thirsty China

Jack & Jill went up the hill

to fetch a million oil barrels,

There broke a fight,

and oil rose its price,

That first them, their indices came tumbling after.

INDIA - The biggest loser!

Currency, that India had been stabilizing for more than 4 months, plummeted to it's 4-month low in one day; due to Iraq tensions that caused Oil prices to rise. Currency that had appreciated itself against ever-so-strong US Dollar could not walk through this chaos, bullet-proof.

(Source: www.seekingaplha.com)

Highly dependent on oil imports, India saw it’s INR and Indices fall the most in over 4 months due to the escalating violence in Iraq which sent crude oil prices to their 10-month high.
Possibly the only country amongst Emerging Markets (EEMs) that felt the tremor of Iraq’s unrest was India. Possibly the only country that kept pacing towards growth was China. Let us question (and answer) - Why..

(Source: www.seekingaplha.com)

So, how is China not affected by Iraq's unrest?

How is Turkey safe from geopolitical tensions in Iraq?

How is South Africa not affected?

How is Brazil untouched? 

(Source: www.etfscreen.com)

ETF Indices as follow:

MCHI- China

EZA - South Africa

EWZ - Brazil

EIDO- Indonesia

TUR - Turkey

INP & INDY - India

CHINA - Thirst is real!

China has been on a hoarding spree for more than half a decade now. Has already bought more than 600,000 barrels a day of surplus crude from January to April, saving itself against world "instability".

By the end of last year, China had collected 141 million barrels of strategic reserve capacity, China National Petroleum Corp said in an annual report released in January.
As China's thirst for crude grows, the International Energy Agency estimates, that by 2030, it will be the world's largest oil consumer, overtaking US.

So, how is China not as affected by the Turkey tensions when it's one of the biggest oil importers in the World?

Porbably becuase most of it's oil is imported by other countries than Iraq.. Saudi Arabia being it's largest crude oil supplier; and also Oman, the United Arab Emirates, Angola, Venezuela and Russia.

ALSO

China's markets' better performance is also the result of release of better than expected Factory production data, which rose 8.8 percent in May YTY, up from 8.7 percent in April. Retail sales increased 12.5 percent and January-May fixed-asset investment growth was little changed at 17.2 percent.

OTHER EEMs:
Why did South Africa and Brazil not tumble down the hill, like India?
Because they are not as highly dependent on oil imports as India, or even China. 

Turkey has been safe and Taner Yildiz, Energy minister of Turkey, has been balancing market sentiments in his country by assuring: “Latest developments in Iraq related to energy sector do not affect Turkey’s crude oil security supply."

Look how US Natural Resources Funds saw a long-time high after oil prices rose this Friday:-

IEO - iShares Dow Jones U.S. Oil & Gas Expl & Prod
IEZ - iShares Dow Jones U.S. Oil Equip & Svcs
USL - U.S. 12 Month Oil Fund
USO - US Oil Fund ETF
Chances are the defense sector would see a price hike too, in the near future, if the war-situation gets more tensed.

Who made CAD the enemy?

Alright so I got a job as a Sell-side Analyst... Miles to go from here. It is what I wanted, I just wanted to get in, and I am still not happy as I know there is so much more to achieve now.. Least I got in.

Anyway, now that I am reading Fundamental, PESTEL, PORTER, SWOT Analysis of companies.. I figured something.
They say a country's Inflation Rate, CAD, Interest Rates affect a country's GDP. Well, true.
But how true is Trade Deficits / Current Account Deficits (CAD) are bad news for a country's economy?

I believed India's currency was stable AFTER we got a grip of our CAD in 2014 by narrowing down oil imports worth billions (As in Aug 2013, USD/INR went to a whooping USD 1/ Rs 69 ).
But then is it the CAD affecting our economy, GDP, Exchange rate? Or is it other factors like Political Stability (Modi Wave for instance), Interest Rates and FIIs?

Investments in Stock Market by FIIS definitely helped our markets to rise... Did they invest because they would have made more money in the exchange or did they do so because they realized it was not one of the "Fragile 5" anymore? Either way, the more FIIs (for any reason) = the more demand for INR; the more demand, that boosts the currency.

What are Current Account Deficits?
Difference between a country's exports and imports. If the country has spent more on Imports than earned on Exports, it's called a deficit; and if a country has generated more revenue from Exports, it is called Surplus.

LOGIC 1:
It definitely makes sense that the more money earned is better than more money spent. How logical is it to spend 400 dollars when you are earning 120? How beneficial is it anyway? How can it strengthen you economically? Of course not. 

LOGIC 2:
But what if the country is dependent on imports? Or what if consumers want to enjoy the imported food, cars, etc? It means we have reached higher quality of living than before! It also means we are losing jobs to foreigners as we are buying foreign products, and unknowingly increasing denand for their workers. CAD could be a good thing if we are borrowing capital/monetary benefits or anything that is expensive in our country (or even non existent!)

Take for eg, borrowing heaps of money from a country with lower interest rate than yours, Also hedging foreign Exchange Rate (to pay back), for a very beneficial investment that you know shall pay double (or more) the time?! 

Look at the chart below and watch the numbers fail LOGIC 1:

Year		GDP		USD/INR	CAD
1999		8		45.9	-4.1
2000		4.15		45.7	-2.7
2001		5.39		47.7	3.4
2002		3.88		48.4	6.3
2003		7.97		45.9	14.1
2004		7.05		45	-2.5
2005		9.48		44.3	-9.9
2006		9.57		45.2	-9.6
2007		9.32		40.2	-15.7
2008		6.72		46	-27.9
2009		8.59		47.4	-38.2
2010		8.91		45.6	-45.9
2011		6.69		48.1	-78.2
2012		4.47		54	-88.2
2013		4.86		61.5	-36.8

(Source: CSO, RBI, EAC to PM, Ministry of Finance

http://planningcommission.nic.in/data/datatable/1203/table_1.pdf)

Take for eg, 2011 - massive Trade deficit of 78.2, yet better GDP than 4.1 deficit of 1999, 6.3 surplus of 2002, 36.8 deficit of 2013, etc.

Massive CAD, yet better and stronger USD/INR exchange rate of USD1/INR48 than a plummeting exchange rate witnessed in 2013 (where it even dropped to a USD/INR 69).

Let's also take US, for example, whose economy is highly dependent on Imports:

Figure 1: U.S. Trade Deficit Vs. GDP (1980-2007)
Year	Trade Deficit	GDP	Year	Trade Deficit	GDP
1980	-19	5,161.7	1994	-98	7,835.5
1981	-16	5,291.7	1995	-96	8,031.7
1982	-24	5,189.3	1996	-104	8,328.9
1983	-57	5,423.8	1997	-108	8,703.5
1984	-109	5,813.6	1998	-166	9,066.9
1985	-121	6,053.7	1999	-265	9,470.3
1986	-138	6,263.6	2000	-379	9,817.0
1987	-151	6,475.1	2001	-365	9,890.7
1988	-114	6,742.7	2002	-423	10,048.8
1989	-93	6,981.4	2003	-496	10,301.0
1990	-80	7,112.5	2004	-607	10,675.8
1991	-31	7,100.5	2005	-711	11,003.4
1992	-39	7,336.6	2006	-753	11,319.4
1993	-70	7,532.7	2007	-700	11,566.8
Source: U.S. Census Bureau

CONCLUSION:

CAD maybe does not solely affect the GDP, but a weaker currency (INR) definitely affects CAD.

For eg, when Rupee falls, the same volume of goods require more INR than they were before (due to Exchange Rate volatility). More money spent (than before) on purchases than money received on exports = Trade deficit!

Only solution is either we cut down our Imported necessities, or produce more to export..