October 5, 2014

WIC Market Wrap-Up

Fortnightly
Market Wrap Up
Year 6, Issue 4
16 November 2014

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

The WIC Market Wrap-Up

The WIC Market Wrap-Up is published fortnightly by the Warwick Finance Societies
Warwick Investment Club (WIC) Research Team. Receive the Wrap Up via email newsletter
by joining the WFS, or look out for archived issues on www.wfsocieties.com.

In this Weeks Issue

Eurozone page 3

ECB monetary policy: Acting

to avoid deflation

Equities page 7

Gym membership for all?

By Conor Ludden

By Anujay Shah

Equities page 4

How the oil industry is

reacting to lower prices
By Louis Csango

UK page 5

Mark Carneys alternative

monetary tool?
By Guy Young

Japan page 6

Yen devaluation: Is Japan

igniting a currency war?
By Shakir Hassan

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

Eurozone

ECB Monetary Policy: Acting

to avoid deflation
By Anujay Shah
Economic weakness in the Eurozone has shown to
extend beyond just the peripheral countries of the
currency bloc, with both Germany and France coming
close to recession in recent months. Q3 saw the Eurozone
grow only 0.8% and inflation of 0.4%, which is well
under the ECBs target. This begs the question of whether
anything more can be done by the central bank to boost
the economy.

lending to these businesses could see huge gains in

employment and in turn could boost the dwindling
inflation. Hence this program has huge potential to help
the Eurozone; however it is also likely that the increased
demand will push yields on high-quality money market
instruments even lower.
In the October press conference, the ECB elaborated on
its plans for a third phase of its Covered Bond
Purchasing Program. Its first iteration took place from
July 2009 to June 2010 where 60 billion were spent and
is credited with helping the fixed income asset class
recover after the financial crisis. CBPP2 ran from
November 2011 till October 2012, but was largely
underutilised, with only 16 billion being used despite

It has been an eventful few months for Eurozone

40 billion being earmarked for the program. This has

monetary policy. On the fourth of September at the

raised concerns over what may impact CBPP3 may have.

monthly press conference, Mario Draghi made a few

Fixed Income assets are already considered by many

major announcements: interest rate changes, the ECBs

investors to be expensive and offer low yields especially

position on its Asset-Backed Securities Purchase Program

when compared to booming equity markets. The

(ABSPP) and a third round of its Covered Bond Purchase

implementation of this program may push the negative

Program (CBPP3). All three interest rates fell by 10 basis

net supply in the market even higher and could reduce

points, with the main refinancing rate falling to 0.05%,

liquidity in both primary and secondary fixed income

the rate on the marginal lending facility to 0.30% and the

markets. Thus the impact that this may have on the

rate on the deposit facility to -0.20%. This was largely in

economy could also be limited.

line with market expectations, given the looming spectre

of deflation, high unemployment (11.5%) and huge spare
capacity within the Eurozone economy. Since then
interest rates have not changed.

Additionally the ECB will begin its Targeted Long Term

Refinancing Operations (TLTRO) program in June 2016.
This is similar to the ABS program in its attempt to boost
credit markets and lending to SMEs. However the ABS

The announcement of such progress being made with the

program is supposed to invest only in simple and

ABS program so soon was largely unexpected, since it

transparent

was only given importance during the press conference

constricted. This program is another way in which the

in June. It is supposedly going to add 250-450 billion

ECB plans to expand its balance sheet. However this may

worth of assets to the ECBs balance sheet over the next

prove problematic as sovereign bond prices are so high

two years and is set to begin before the year end. The

that a balance sheet expansion through these means

program will allow the ECB to buy asset-backed

seems difficult. This is no trivial matter. As earlier LTRO

securities, with the specification that the funds which the

assets are paid back and the euro depreciates, the balance

banks receive can only be used as loans to small and

sheet of the ECB shrinks and with it, the monetary base

medium sized enterprises (SMEs). This is largely what

of the Eurozone, thus putting downward pressure on

has been lacking in the Eurozone economy: large firms

prices. This puts the currency bloc in a situation similar

have been able to attain loans at fairly low rates off the

to that of Japans just before it underwent its lost decade.

strength of their balance sheets, whilst SMEs have

struggled to attain them. Since SMEs across the Eurozone
employ about two thirds of the work force, a boost in

assets,

whereas

TLTROs

are

not

as

Whilst outright quantitative easing may not have taken

place, it certainly seems more likely given the purchasing

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

programs. It seems a necessity that these programs are

put into place soon, or else the Eurozone may find itself
fending off deflation and with stagnant growth for years
to come.
WIC

Equities

How the oil industry is

reacting to lower prices
By Louis Csango
In recent months the price of oil has been falling amid a
global economic slowdown and vigorously growing
production volumes from the U.S. . Oil has been falling
since June from over $100 and U.S. crude closed last
Friday just under $76. With a potential merger between
two of the major oil services companies, Halliburton and
Baker Hughes, we see the first signs of falling oil prices
taking their toll.
Oil services companies provide producers with the
necessary equipment to lift oil and gas reserves: they sell
or rent out gadgetry, make workers available and build
apartments for miners in remote areas. Oil drilling
service companies also provide the drilling parts
available that can be controlled precisely in the
underground. They also provide heavy vehicles for use
in the shale gas or shale oil production, where they
pump liquids with much pressure into the rock to
dissolve raw materials from it. This pumping technology
is booming in the United States, but the recent oil price
fall threatens the business model of the service, as it
could make oil and gas production less profitable. As a
result, some oil producers could scale back their business
or demand better prices from their suppliers.
As producers first seek to reduce their costs for services
such as drilling and fracking, it is not surprising that we
see the first problems emerge with oil services companies
such as Halliburton Co., whose shares have fallen nearly
26 percent since its peak in late July.
The share price of the third largest American oil services
company, Baker Hughes, shot up by 15 percent on
Thursday. This was the reaction to the recent rumours

that the industry's second largest company, Halliburton,

is looking to buy Baker Hughes.
Investors are clearly excited about the cost saving
opportunities, as at the end of the trading day, Baker
Hughes was worth over $26 billion. The merger would
be the largest transactions in the energy sector in recent
times. Since 1995 there have been only 11 mergers in the
industry valued at more than $ 20 billion worldwide,
according to the information service Dealogic. With such
a merger, the two companies could hedge against a
further decline in the price of oil, benefitting from
economies of scale.
Baker Hughes chart (Friday 16 November 2014)

Source: Yahoo

Beginning of a broader trend?

As we mentioned already, oil services are the first ones
likely to feel the pressure from lower oil prices. With
signs of consolidation between those companies, this
could mark a wider trend in the energy industry. If
prices remain low, producers could also be looking into
the possibility to counter that pressure by merging with
peers and increasing efficiencies. This could present
opportunities in the energy equities markets, as we could
see a lot of price movements.

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

Because of the structure of the U.S. shale oil industry, one

can not take a broad view about the future of the
industry. Behind the surge in U.S. oil output, which hit
nearly 9 million barrels a day this month, are small and
midsized companies, which show a broad array of
characteristics in terms of location - affecting production
costs - and debt structure.

UK

Mark Carneys Alternative

Monetary Tool?
By Guy Young
On Wednesday this week Mark Carney, the current

For instance, producers like Marathon Oil Corp.,

Anadarko Petroleum Corp. and EOG Resources Inc., are
based in the Eagle Ford Shale, in South Texas.
Companies in this region are profitable between prices of
$53 to $65. On the other hand, we see companies like
Goodrich Petroleum Corp., operating in the Tuscaloosa
Marine Shale in Louisiana, with a break even point of
$87, whose shares are down 70 percent since June.

Governor of the Bank of England, presented very weak

forecasts for inflation in an overwhelmingly dovish
quarterly report. With current inflation at 1.2%-its lowest
since September 2009-Mark Carney explained that
interest rates were only likely to rise from their record
lows in October next year.
In June of this year the Governor of the Bank of England
had a slightly different tone, declaring that interest rates

Moreover, many oil companies have hedged their

production, ensuring a much higher price then currently
for their output, thereby supporting producers in the
short and intermediate term. Devon Energy Corp. and
Noble Energy Inc. are among the companies who have
managed to lock in high prices for their 2015 production.
This means that some oil producers will not feel the
shock of lower prices in the coming year. But 2016 could
be very different. As the owner of an Oklahoma City
Energy Company, Robert Hefner III, put it: "[Oil
producers] have clear sailing for 2015, but beyond that
and I think many of them could be hurting." If this
occurs, we could see consolidation within the industry,
with producers trying to cut costs and pump out more
material in an effort to lower units costs and improve
their position on the cost curve. As evidenced by the
potential Halliburton-Baker Hughes merger, the market
welcomes these actions and there could be opportunities
in the future.
Finally, some of the most efficient producers can offset
lower prices, by learning how to produce more at lower
costs. For instance, SM Energy Co. by only increasing its
costs by 10 percent, is achieving a 40 percent higher
production. Because every producer is so inherently
different, this means for investors that investing in an
index, such as the NYSE Energy Index, is maybe not the
right approach to get exposure to the industry, and one
should turn to an actively managed portfolio.

could rise much faster than people expect which

shocked the market and brought expectations for an
interest rate rise to late 2014 or early 2015. At the time
inflation stood at 1.5% and GDP growth was similar to
current growth- an annualized rate of approximately 3%.
So why was there such a considerable change in outlook
when the fundamentals have not changed significantly?

More pessimistic commentators have argued that it is in

Mark Carneys best interest to mislead the market. In
theory, low interest rates help to boost GDP growth and
levels of economic activity by making borrowing cheaper
and reducing the incentive to saving; of course in doing
so, your run the risk of increasing inflation and forming

WIC

asset bubbles fuelled by cheap borrowing. In June this

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

year we were experiencing rapid growth rates in house

Euro which helped to reduce borrowing costs in the

prices (as high as 17% per annum in London) and many

periphery to unthinkable lows) it is important for the

were calling for the Bank of England to intervene.

market and investors to understand the policy makers

Raising interest rates could have been a solution, but as

incentive to mislead.

mentioned above, we would run the risk of slowing the

recovery and deflation (as inflation only stood at 1.5%). If
Mark Carney had rather told the market that rates were

WIC

going to rise sooner than expected, this would put some

Japan

home buyers off purchasing a new home if they thought

Yen Devaluation: Is Japan

that variable interest rates on their mortgages were going

to rise soon, which would have the effect of slowing the
housing market down without slowing the economy
down. And that is exactly what he did.

igniting a currency war?

By Shakir Hassan
Last month the Bank of Japan surprised the markets by
introducing a fresh blitz of stimulus. It has pushed
quantitative easing to unprecedented levels in an attempt
to try and revive sagging growth, drive down the Yen
and escape a relapse into deflation. But this may not be
the solution to Japans problems. Even worse, its
aggressive policy is posing the risk of igniting a
dangerous currency war.
We have seen the Yen plunge 20% against a tradeweighted basket of currencies since late 2012 when Prime
Minister Shinzo Abe announced plans to stimulate the

With low oil prices and cheaper imports from slowing

global growth, the general consensus since June has been
that inflation would stay low-and so I firmly believe that
Mark Carney intentionally misled the market in the
knowledge that raising rates this early would be too
dangerous considering the risk of deflation. Although
this is not necessarily a bad thing nor is it unique to the
Bank of England- central bankers have a long history of

economy. The latest move by the BoJ, to introduce extra

QE has already sent the yen plummeting 5% to 116
against the dollar, the weakest in seven years. The
currency has fallen 40% against the dollar, euro and
Korean won since mid-2012, and 50% against the Chinese
yuan. Devaluation has become commonplace in economy
which has lost half of its global export market share over
the past 20 years.

misleading us for our own good. In this case, I believe

However, the decline of Japans dominant export sector

that Mark Carneys strategy was commendable-but it

does not seem to be as a result of an overvalued

does come with a price. Every time we are misled we

exchange rate. This reinforces the idea that a devaluation

become less trusting, and this tool will become less

of the Yen is not the wisest of approaches. Japans

useful. Although the central bankers repertoire has

economy has lost the competitive edge in innovation it

expanded with Quantitative Easing, they should be

once used to have. Its industry sector is plagued with a

careful of losing the trust of the public and therefore

large, outdated capital stock; coupled with ageing

control over their expectations.

employees at the corporate level.

In a time where every word a central bank governor

Prime Minister Shinzo Abes resolution to Japans

utters is analysed and interpreted and where markets

stagnation, Abenomics, comprises of yen devaluation,

react hugely to statements (for example Mario Draghis

reflation, fiscal stimulus and structural reforms. So far,

assertion that he would do whatever it takes to save the

we have seen little in the way of structural reforms,

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

whilst currency devaluation and increased QE do not

With Japan going for beggar-thy-neighbour currency

seem to tackle the root of Japans problems. Yen

devaluation and the Eurozone beginning to target a

depreciation appears to worsen Japans structural

lower exchange rate through its own version of QE,

problems by further decreasing consumer spending

China will face pressure to join in on the currency war.

while increasing business income. Consumer demand in

This could ignite even more economies to look at

Japan is weak because too much income is flowing to

cheapening their currencies. But with current global

companies instead of households. We can see evidence of

consumer demand being so weak, these economies will

this by looking at the percentage of GDP made up by

realise that serial devaluation is not a long-term solution

corporate profits, which is much higher than other

to growth. The US seems to be showing that structural

economies like the US.

reforms are the correct approach to take and Japan

should look at following this, rather than targeting Yen

In terms of QE, simply printing more money to purchase

devaluation.

government bonds is not going to generate real growth

without the accompaniment of structural reforms. The

WIC

outcome of this process is that Japan is running the risk

of generating the dangerous combination of cost-push

Equities

inflation and no economic growth. With global consumer

demand being weak, Abe must target more structural

Gym Membership for All?

reforms as a solution to Japans problems.

Sports Direct and the Fitness Revolution

Japan can look at the US as an example of a major

By Conor Ludden

economy restructuring after the crisis. The government

This week, Sports Direct International, founded by

has reduced its primary deficit to levels that will stabilize

Newcastle United owner Mike Ashley, announced plans

the public debt-to-GDP ratio, while household debt is

to open a chain of 200 budget gyms, offering

back to sustainable levels. Furthermore, the US has

membership from 5 per month. Such a move, described

begun to regain relative labour competitiveness. We can

by a company spokesperson as affordable fitness on an

expect to see US real GDP growth to remain above trend

unprecedented scale could be perceived as a strategy

for a couple of years. However, this does not mean that

which diversifies beyond the companys reach or a savvy

we will see an import boom; this recovery will be based

move, aimed at tapping into the mass market for fitness.

on the US internally producing more of what it

Unfortunately for Sports Direct, the initial reaction of the

consumes.

market was towards the former: on the day of the

announcement (11th November), Sports Directs shares

Looking closer to Japan, Chinas model for growth has

fell by 4.49%, emphasising the concerns of shareholders.

changed

increase

Indeed, this has been a more sluggish year for the

investment levels to balance the export shock during the

companys share price, down 14.31%, compared with

crisis has not been as effective as intended. Pouring

astronomical growth of 76.6% and 84.4% in 2012 and

money into low productivity capital simply racked up

2013 respectively.

drastically

post-crisis.

Plans

to

national debt too quickly. We have seen growth levels

slow sharply over the past three years, with domestic

The company maintains that the overlap of the gyms

demand becoming ever more stagnant. Moreover,

with its existing sporting goods stores is reason in itself

Chinas imports and corporate sector have been hurt

to believe in its strategy, and there is an undeniable gap

because of an overvaluation of the renminbi. Looking at

in the market for budget gyms: however, in a week

this we can see that China will not be able to drive

where

growth through consumer spending unless there are

exploitation of zero-hour contracts, describing it as a

structural reforms.

terrible place to work, one has to question whether the

Ed

Milliband

criticised

the

companys

companys employment practices could overshadow its

expansion. Ashleys no-nonsense, efficient and cost

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

cutting approach to management could in many ways be

Some of Sports Directs gyms will be next to their

compared to Michael OLeary of Ryanair: both share the

superstores, exploiting the synergies between their new

objective of making their product or service accessible to

service and existing products. Time will be the best judge

a mass market, but both face criticism and potential

as to whether the company has already missed the boat

pitfalls on a number of fronts. This is evidenced by the

for affordable gym membership and whether the market

increasing popularity of fitness-tracking wristbands: in

for fitness is moving in a different direction. However, in

the run up to Christmas, Microsoft, Fitbit and Jawbone

a week which the Financial Times released a report on

have all announced news wristbands, and are predicted

the growing obesity epidemic in the developed world,

to be big sellers. While these wearable devices cater for a

Sports Directs announcement this week is welcome.

relatively different consumer, there has certainly been a

Although the markets reacted negatively initially, the

rise fitness regimes which rely exclusively on personal

companys incredible track record of cutting costs and

technology, reflecting the hassle of having to travel to

appealing to a large consumer base make it a potentially

and from a gym.

attractive long-term investment.

WIC

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

The WIC Research Team

Editor
Jonathan Denham
j.c.denham@warwick.ac.uk

Co-Editors
Alexander Bunzl

Zak Simpson

a.bunzl@warwick.ac.uk

z.simpson@warwick.ac.uk

Anujay Shah
anujay.shah@warwick.ac.uk
Bogdan Marcu
b.d.marcu@warwick.ac.uk

Analysts
Adele Unneberg

Lim Jia Jun

a.nordgaard-unneberg@warwick.ac.uk

jia.lim@warwick.ac.uk

Connor Ludden

Louis Csango

c.ludden@warwick.ac.uk

l.csango@warwick.ac.uk

Guy Young

Shakir Hassan

g.r.young @warwick.ac.uk

shakir.hassan@warwick.ac.uk

Jack Melbourne

Stanley Mwangi

j.a.k.melbourne@warwick.ac.uk

s.mwangi@warwick.ac.uk

Warwick Investment Club Research Team

November 16, 2014

WIC Market Wrap-Up

Join Us
As a reader. The Market Wrap Up is published by the Warwick Finance Societies WIC
Research Team every alternate Sunday during term time. Receive the Wrap Up via email
newsletter by joining the WFS, or look out for current and archived issues on
www.wfsocieties.com.
As an Analyst. Undergraduates and postgraduates with keen interest in the markets may
apply to the teams Analyst Programme; candidates with prior research experience will be
considered for a Co-Editor role. Do get in touch with Jonathan at j.c.denham@warwick.ac.uk if
you are keen on contributing.

Disclaimer
This document was produced by Warwick Investment Club for information purposes only and for the sole use of the
recipient. The analysis contained in this document has been procured, and may have been acted upon, Warwick Investment
Club and connected societies for their own purposes, and the results are being made available to you on this understanding.
To the extent permitted by law and without being inconsistent with any applicable regulation, neither Warwick Investment
Club nor any connected society accepts responsibility for any direct or indirect or consequential loss suffered by you or any
other person as a result of your acting, or deciding not to act, in reliance upon such information, opinions and analysis.
The information in this document is not intended as an offer or invitation to buy or sell securities or any other investment or
banking product, nor does it constitute a personal recommendation. Nothing in this material constitutes investment, legal,
credit, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your
individual circumstances. The price and value of investments mentioned and any income that might accrue can go down as
well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide
to future performance. Where investments involve exposure to a foreign currency, changes in rates of exchange may cause the
value of the investment, and the income from it, to go up or down. The information in this document is believed to be correct
but cannot be guaranteed. Opinions and forecasts constitute our judgement as at the date of issue and are subject to change
without notice.

Warwick Investment Club Research Team

10

November 16, 2014

WIC Market Wrap-Up

Warwick Investment Club Research Team

11

November 16, 2014

WIC Market Wrap-Up

Warwick Investment Club Research Team

12