Tuesday, August 27, 2013

Syria: What I worry about

As I write this, global equities are selling off because of nervousness about an attack on Syria. But why should the market be nervous? Is it because of a spike in oil prices? Syria is not a major oil and gas producer and oil prices should normalize once the political situation calms down. On that basis, the knee-jerk sell on Middle East turmoil response is unwarranted.

The specter of a gas cartel
However, there are some possible developments in the Middle East that would make me nervous. First of all, the Telegraph reported that the Saudis offered Russia a secret oil deal if it drops support of Syria:
The talks appear to offer an alliance between the OPEC cartel and Russia, which together produce over 40m barrels a day of oil, 45pc of global output. Such a move would alter the strategic landscape.
As an additional carrot, the Saudis offered to safeguard the Sochi 2014 Winter Olympics from Chechan rebel attack:
As-Safir said Prince Bandar pledged to safeguard Russia’s naval base in Syria if the Assad regime is toppled, but he also hinted at Chechen terrorist attacks on Russia’s Winter Olympics in Sochi if there is no accord. “I can give you a guarantee to protect the Winter Olympics next year. The Chechen groups that threaten the security of the games are controlled by us,” he allegedly said.

Prince Bandar went on to say that Chechens operating in Syria were a pressure tool that could be switched on an off. “These groups do not scare us. We use them in the face of the Syrian regime but they will have no role in Syria’s political future.”
If the Russians were to accept the Saudi offer, the prospect of a natural gas cartel would be negative development for global growth:
President Putin has long been pushing for a global gas cartel, issuing the `Moscow Declaration’ last to month “defend suppliers and resist unfair pressure”. This would entail beefing up the Gas Exporting Countries Forum (GECF), a talking shop.
So far, Putin has refused to abandon Syria:
The Putin-Bandar meeting was stormy, replete with warnings of a “dramatic turn” in Syria. Mr Putin was unmoved by the Saudi offer, though western pressure has escalated since then. “Our stance on Assad will never change. We believe that the Syrian regime is the best speaker on behalf of the Syrian people, and not those liver eaters,” he said, referring to footage showing a Jihadist rebel eating the heart and liver of a Syrian soldier.

An unwelcome development for Merkel's re-election hopes
The developments in Syria has the potential to cause de-stabilize the eurozone. Der Spiegel noted that Syria intervention may endanger Merkel's re-election:
It is an election that few German politicians will soon forget. In 2002, as the US was ramping up its anti-Iraq propaganda preparatory to invading the country the next spring, German Chancellor Gerhard Schröder said, "Germany will not participate in a war against Iraq." It is a sentence that put relations between Berlin and Washington in a deep freeze.

But Schröder, of the center-left Social Democrats (SPD), didn't mind: Just weeks after making the pledge, he eked out a close re-election victory against conservative challenger Edmund Stoiber who had refused to be so categorical.
The idea of intervention is unpopular in Germany, but Merkel has made a stand in its favor:
Chancellor Angela Merkel appears to be betting that the horrific images that emerged from last week's apparent use of chemical weapons in Syria will be enough to trump the German electorate's traditional pacifism.

On Monday, she came out strongly in favor of an international response to the massacre last Wednesday. "The alleged widespread use of gas has broken a taboo," Merkel's spokesman Steffen Seibert said. "It requires consequences and a very clear response is needed."
Should Angela Merkel lose the election to her main rival Peer Steinbrueck, it could serve to destabilize the delicate relationship between core and peripheral eurozone countries, Germany and France, as well as Trans-Atlantic relations. Steinbrueck has advocated the suspension of EU-US trade negotiations over reports of Americans spying on European diplomats:
Peer Steinbrueck, a candidate to be Germany's next Chancellor, has demanded to halt EU-US trade negotiations amid revelations that Washington is spying on its European allies.

"I would interrupt the negotiations until the Americans say if German government offices and European institutions are bugged or wiretapped," Steinbrueck said on Sunday (24 August) in an interview with public broadcaster ARD.

He noted that the current government, run by Angela Merkel, is trying to cover up the scandal and that it makes no sense to negotiate on sensitive trade issues when the US can know at any point what the EU is discussing internally.

Already, the NSA spying scandal is seeing a fallout for US companies. German email service providers are seeing a surge in demand in the wake of the NSA revelations (also see my blog post Snowden affair fallout: RIMM experience as a blueprint for US tech?). Regardless, any time the prospects of global trade seizing up is not good news for equity prices.

In conclusion, I believe that the knee-jerk reaction to sell stocks on the fear of an oil price spike is unwarranted. However, I have other concerns of other risks. If these risks materialize, they could cause grave concern for Europe and the growth outlook for the global economy.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

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