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Mar-Apr 2016

FINANCIAL STRATEGY

04

03

Editors note

04

Oil and natural gas outlook

Adley provides an insight into one of
the most volatile markets today.

07

Renewable energy investment

Danyal shares an insight into
renewable energy investment potential.

SECURITISATION
EXPLAINED

09

Chinese Stock Market Outlook

The impact of the circuit-breaker and
new government policies on the market

07

14

14

Rouble Crisis

Evaluating the resaons for a collapse

of the Russian currency and its
consecuences for the society

09

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2016
Mar-Apr
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Mar-Apr 2016

OIL AND GAS

MARKET OUTLOOK
BY ADLEY CHAN

prices to this extent demonstrates robust underlying

pricing power and strong consumer demand, said
market analyst Alan Clarke of Scotiabank. According
to the government statistics, there is a higher number
of passengers compared to the same month in 2014.
Consumers are spending the windfall from lower
outgoings on food and [gasoline], said Clarke.

Last year, oil and gas market were showing

bearish signs and experts are predicting tough

years ahead. The continuous decrease in crude oil

prices has severely hit the industry which restricts
the long term planning of individual companies.
Falling oil prices affect various industries by varying
degrees. Aviation industry, which has oil as its highest
cost component, does not translate decreasing oil
prices into lower airfares. The ONS inflation report
for 2015 shows the largest monthly increase in the
number of UK flights since 2002 between November
and December 2015. "The fact that airlines can increase

FUTURE OUTLOOK
People are more conscious of the environment, the
rapid development of renewable energies and green
technologies nowadays, which will translate into
decreasing profits of the oil industry. In June 2015, a
statement has been issued by G7 industrialised

nations to end the use of petroleum-based energy by

the end of the century. During the COP21 summit in
Paris last year, more than 200 world leaders agreed to
decrease the net amount of greenhouse gas emission
to zero within the set timeframe. In other words, fossil
fuel production and consumption will be diminished
in the foreseeable future.
In the face of the current challenging situation,
analysts from Deloitte suggest that the industry

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is getting stronger by introducing innovation and

adjusting to the new economic environment. Oil and
gas companies are forced to research more on costeffective extraction and production methods. In the
future, especially when prices rebound, higher unit
margin and return on capital employed could be
achieved.

Mar-Apr 2016

effect can me attributed the agreement among OPEC

members and non-OPEC members to maintain the
level of supply set in January.

However, some analysts view the rise in March and

April as a short term effect and expect a lower average
price of crude oil in the future. The low oil prices
have raised warning by Moodys ratings agency of
Update
potential declines in output if oil producers defaulted
Forward prices for Brent crude oil brought good news on debt. Due to weak crude prices, Saudi Arabia is
to the industry at the beginning of March 2016, which experiencing budget deficit, and Reuters reported that
showed the recovery of more than fifty percent from it was seeking its first significant foreign borrowing in
the 12-year low of $27.10 on January 20. Part of the over a decade to help to cover it.

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Mar-Apr 2016

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Mar-Apr 2016

RENEWABLE ENERGY
OUTLOOK
BY DANYAL ADNAN

greater share in the energy market, as investors grow

wary of the long-term prospects of oil and look for
alternative investments. With the major oil producers
recently failing to reach an agreement in Doha to cap
production, this situation may not change any time
soon.

2016 has proven to be a triumphant year for

the renewable energy industry, owing largely to
a supply glut in the oil sectors as well as social
initiatives undertaken by numerous corporations
and governments worldwide. Public appeal and
optimism around the use of renewables has
strengthened dramatically over the past few years,
as the consequences of climate change and fossil
fuel exploitation are being increasingly politicized.
Furthermore, the conditions of the fossil fuel
industry since July 2015 have created the near-perfect
environment for renewables to excel and control a

Renewable energy investments jumped to a record

$328.9 billion in 2015, with over one half of the
investments coming from the Asia-Pacific region
(Bloomberg). China contributed with $111bn with a
majority of that sum invested in the solar industry.
This reflects part of Chinas effort to steer itself away
from highly polluting energy sources like coal to much
cleaner options. It also highlights the unanticipated
cost-competitiveness of renewable energy sources, as
investments were expected to stall along with those
in oil and gas, but instead they witnessed growth.
In the US, clean energy outshined fossil fuels as
the largest source of new power capacity added to
electrical grids in 2015, for the second consecutive
year. Renewables accounted for 68% of the added
capacity, with wind farms making up the largest slice
of the pie (Bloomberg). Similarly in Europe, energy
generated from wind turbines accounted for 44%
of new generating capacity, compared to 21% from

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FINANCIAL STRATEGY

gas, 17.5% from coal and 15.5% from hydro, making

wind their third largest source of electricity in 2015.

Mar-Apr 2016

hit the road in late 2017.

In the developing world, countries currently share

a slightly different approach towards the inclusion
of renewables to their economy. Oil producing
states of the gulf have been historically reluctant to
incorporate renewables in their local grids, but due
to the depressing effect of the current oil supply
glut on their economies, several countries are
taking a renewed approach towards clean energy.
Future energy summits, plans for new local banks
specialized in the solar industry, and other initiatives
have emerged with the backing of local governments
and corporations. India on the other hand is one
Moreover, in the automobile industry, Tesla is step ahead of countries in the developing world in
making an unprecedented mark as probably the most incorporating clean energy in its power systems,
prolific electric-car manufacturer in history. The making it the fifth largest wind energy producer in
manufacturers success has sparked debate about the the world.
need for disruptive innovation in the automobiles.
There is disagreement between economists, however, Much of the expansion of renewable energy
regarding Teslas role as a disruptive innovator. Many in the past few years can be attributed to the
argue that though Tesla has introduced transformative collective efforts of governments, organizations,
systems, it will need to bridge the gap between electric and multinational corporations around the world.
cars and large-scale solar power if it wants its products Though most of the extraordinary progress is
to create any real disruption. The establishment of its concentrated in the developed world, the growing
gigafactory and the introduction of Powerwall are awareness of entrepreneurial opportunity in clean
few of the steps Tesla has taken to bridge that gap, energy is increasing its utilization in the developing
but it may need to introduce new electric products world as well. Many corporations and countries are
in order to boost demand for these systems. Its willing to shift from labels of oil producers and gas
brand new budget model, the Model 3, is already producers, to envisioning an all-inclusive future as
approaching 400,000 orders, beating any other energy producers; thus finding the expansion of
electric competitors by a long shot. It is expected to renewable energy as an opportunity, and not a threat.
Banks and other corporations also have been
increasing the amount of funds they commit to
renewables, with Bank of America creating the
initiative to raise at least $10bn for clean energy.
Several major banks including HSBC and Credit
Agricole joined this initiative in April, helping raise
$8bn so far. Furthermore, the World Bank also plans
to increase its direct funding of clean energy projects
by 50%; from $2.3bn to $3.5bn over the next five
years.

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Mar-Apr 2016

CHINESE STOCK
MARKET OUTLOOK
BY MYA ZHONG

a substantial capital outflow from the Chinese stock

market and encouraged ordinary Chinese to convert
their savings into foreign currency and foreign assets,
exacerbating the situation at the Chinese stock
exchange.

Central Bank cuts interest rate:

The Peoples Bank of China cut its key lending rate by

0.25 percentage points to 4.6% to calm stock markets
after the turmoil. In order to increase the flow of
money in the economy, the policy-maker has cut

Overview

Chinese economy, the worlds second largest, has

been growing at an average annual rate of 10% over
the last three decades. However, this year the growth
rate fell to 6.8%. Chinese stock market suffered this
quite drastically, falling from 5166.35 to 3507.19 since
the second half of 2015. So, what is going on with the
Chinas stock market?

Renminbi devaluation:

Renminbi devaluation refers to the weakening of yuan

against the U.S. dollar. As the renminbi slides another
6% reaching its lowest level against the dollar in five
years, some experts expect the dollar to buy 7.30 yuan
by the end of 2017, up from previous prediction of
6.80. The policy maker from The Peoples Bank of
China devoted to pushing the currency even lower
in order to boost the domestic economy. That should
theoretically raise Chinas exports and reduce its
imports. However, the move has unleashed turmoil
in both local and international stock markets. In
addition, the rate hike by Federal Reserve caused the
US dollar index (DXY) intraday to break 96.44 on the
13th of July 2015. By doing so, the U.S. government
aims to increase the amount of investment into the
economy, create more job opportunities and control.
The event has led to a significant decrease of the
valuation of the Renminbi capital, which resulted into

the amount of cash that banks must keep in reserve,

enabling them to lend more. Some investors
broadly welcome the radical move. This has enabled
speculators to borrow more cheaply and invest in the
stock market, which has led to a light increase the
stock price. These adjustments, to a certain extent,
stimulate speculators to spend more, which will boost
the economy in the short run, but its not sustainable
in the long-term. This is because when lower interest
rate lasts over a long period of time, it will bring about
currency depreciation and can slow down the rate of
economic development. Therefore, it can be observed
that the Chinese authorities have taken some steps to
help stem stock market losses since the market began
a series of heavy falls, but the revivification of the
stock market cannot rely on the releasing policies.

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Circuit-breakers

Chinese stock market crashes with the use of circuitbreakers. Operations hit the 5 percent level first and
then closed the market at the 7 percent level soon
afterwards. The trading lasted only for 14 minutes
before being halted. In theory, the circuit-breaker
should have calmed the markets, as in the example of
the U.S.A. The US circuit-breaker paused trading of
all exchange-listed securities throughout U.S. markets
as a response to the May 6, 2010, crash. This event
not only spooked investors, embarrassed speculators
and regulators, but it has also revealed deep flaws in
market structure. However, Chinese authorities with
the aid of this mechanism encouraged traders to lock
in sell orders to make sure they are first to escape the
market before the market reached the bottom line. This
implication seems to help market reduce volatility, but
it triggered a panic-driven spiral because of confusion
and uncertainty it had caused for individual investors.
Hence, the stock price declined during these periods.

Mar-Apr 2016

Even though the Chinese authorities increase the

supply of capital and then put it into the stock
exchange to drag the price up, it does not work in the
long- term according to the evidence of 2009. The
government has offered 4 trillion yuan to strengthen
the confidence of individual investors so as to rescue
the market; however, the end result was below analysts
expectations. Once the capital or given resources are
dried up in the market, the depression will return in
a vicious cycle. In fact, the actual downturns of the
stock market could be resulted from the out-of-date
industries. If these out-of-date companies transfer
to sunrise businesses and increase the number of the
sunrise companies in the stock market, their good
performance will push the share prices up.
In particular, the government should give more
room for development for small and medium size
business to enable greater future vitality by reducing
potencies of state-owned industries. For instance, the
government could encourage emerging business like
New Over-The-Counter Bulletin Board to be listed
on the stock market so as to broaden the scale of the
Over-The-Counter Market, raising more funds to
improve operations and then expand at a faster pace.

Only if this plan was put into practice, more jobs would
be created by these sunrise industries, the income per
capital would rise at a reasonable percentage so that
the spending by both households and firms would
grow up. This is an essential step to accelerate the flow
of money into the domestic market and reduce the
amount of offshore capital. Meanwhile, it is beneficial
to the real economy. On the other hand, in this context,
eliminating sunset industries or restructuring these
Government measures and investors reaction out-of-date industries plays a crucial role in revitalizing
No matter how the policies or external factors affect the market. Hence, to attract foreign investment into
the market, currently the most important almsgiving the domestic stock market or strengthen Chinas stock
measures dont only depend on government market it is better to allow small and medium size
policies stimulating the stock market. In light of the businesses to release their potential in the market.
depression in the global market and the pressure from
an ever stronger dollar, the performance of Chinese
market suffered an embarrassing setback. All of this
happening on the background of a lower demand
for staple commodities, lower purchasing power and
continuously falling worldwide consumption. Hence,
a decrease of export is not an abnormal phenomenon.
One of the challenges faced by the country is the
oversupply of goods, which results in a loss of profit of
the producing industries. Hence, investors should not
anticipate an increase of returns on their investments
and take their money out from the stock market.

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Mar-Apr 2016

SECURITISATION
EXPLAINED
BY KIRILL IVANOV

securitisation to a bank is that it allows banks to

separate the risks between those of a bank itself and
those attached to secured assets.

How does it work?

Let me begin with the simple model and additional

details will be added along the explanation.
In step one, a company (the originator) with loans,
mortgages or any other type of assets that generate
steady returns, identifies the assets that it desires to
remove from its balance sheet and collects them in
a so called reference portfolio . (1) It then sells the
portfolio to a special purpose vehicle (SPV) - an entity
created by a financial institution to fulfil narrow, specific
and temporary objectives with the purpose of effective
management of financial flow. (2) The company then
repackages the purchased pool of assets into interestgenerating securities that could be easily traded at the
capital market, coordinates with underwriters, who
enable the SPV to sell these securities to investors (3).
The SPV then uses this money to purchase the pool of
assets from the originator.
However, it only makes sense for the originator to
conduct this operation if it is able to gain from it by
attracting money at a lower rate than it would otherwise
do. For example, if a company can borrow from a
financial institution at 5% interest rate, securitisation
will be appealing if it is paying investors less than 5%.
In order to achieve this, it has to assure investors that
the securities are of the high quality and have low level
of risk. This is when insurance companies and rating
agencies come into play.

Thanks to the financial crisis, from which we are

yet to recover, most of us have been exposed to a huge
amount of financial terms, which were supposed to
give us some insight into the causes of the recession.
Yet some of us, even those studying for finance related
degrees, still struggle to get an understanding of the
key principles of different financial instruments. One
of them is securitisation. In this article I would like
to outline the key features of secured assets, explain
step-by-step how they are formed and describe the
role of various financial institution in their formation.
Securitisation is simply a method of attracting
additional capital to a company or a bank in line with
borrowing, issuing extra shares and corporate bonds.
However, the key feature of securitisation is that it
is done through issuing papers secured by financial
assets that generate steady returns (e.g. mortgages,
loans, property etc.).
The key instruments are: Mortgage-Backed Securities
(MBS), Asset-Backed Securities (ABS), Future-Flow The originator agrees with an insurance company to
secure future payments of the securities, so that if a
Securities (FFS).
debtor delays or does not make the payment, the
Why is it needed?
insurance company will compensate for it and the
When a bank provides a mortgage, it loses some of investors will not be affected. (4) The securities should
its readily accessible cash, which will be paid back to also be rated by a rating agency such as Standard &
the bank only in the next 25 years. If a bank provides Poors and Moodys to enable investors to weigh their
lots of mortgages, soon it will have to significantly risk profile. Mortgage Backed Securities tend to have a
reduce its lending activity, due to insufficient reserves relatively low risk as property tends to appreciate, plus
and regulated liquidity norms. Another benefit of future interest is secured by an insurance company,

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Mar-Apr 2016

Now, investors become the legal owners of the loans

and mortgages. However who is supposed to hold this
pool of assets? For this purpose investors nominate a
trustee, which will be holding this pool of securities
and will represent the interest of investors in case any
problem with debtors or financial institution should
arise. The SPV passes the pool of assets to this trustee
(5).

lent the money in US dollars, but the SPV is in the

EU and issued its securities in euros. This exposes
the instrument to a risk of change of the exchange
rate. In order to hedge (reduce) the risk, the trustee
can arrange a currency swap, so that a change of the
currency rate does not affect the profitability of the
asset.

As investors are now the legal owners of loans and

mortgages, it would be reasonable to assume that
the debtors have to return their loans to investors.
However, in order to make the process much fairer
and more convenient, the bank now plays the role of
a service agent which collects the payments on behalf
of investors (6) and passes them to the trustee (7). The
latter transfers the money received to the investors (8).

For investors securitisation offers a wide range of

investable assets with different risk levels, which could
be tailored for individual preferences of an investor.
For example, pension funds require high quality longterm fixed income investments. Furthermore, high
liquidity of this type of financial instruments allows
investors to adjust quickly to a change of economic
environment and reduce their risk exposure at a
relatively low cost.

Trustee

It becomes of the vital importance that a trustee is an

investment bank, which is able to control the money
flow. Why is it important? Lets say that borrowers
make monthly repayments to the bank, but the
interest/coupon on ABS and MBS is paid only on
quarterly or half-year basis. Therefore, there is a time
lag between the date of coupon payment and the date
of receiving this money, which could be used to gain
some small amount of interest in the meanwhile.
Secondly, when borrowers make repayments, they
pay the interest rate as well as a portion of the amount
borrowed. However, ABS and MBS only mature in 1015 years, which therefore leaves some of the capital
unused. Investment banks could take advantage of
this and allocate it to some more profitable activities.
Lastly, lets assume that the bank is in the USA and

Securitisation for investors

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Mar-Apr 2016

ROUBLE CRISIS
BY WENYANG MIN
Main reasons behind the crisis

The problems seem to have been building up over

a long period of time. Russian economy is seriously
dependent on foreign trade and investment; with
approximately 70% of Russian export consisting of
oil, natural gas and refined petroleum products and
50% of government revenue coming directly from
the oil sector (Wilson, 2015).

Introduction

The relative value of a specific currency is

fundamentally determined by its supply and demand
in the market (Crespo Cuaresma et al., 2014). There
are many issues that could impact on the currency`s
supply and demand factors in the market; their effect
on currencies is varied from one country to another,
depending on the characteristics of a particular
economy. In 2014, currency devaluation has been
confronted by many developing countries, while
Russia is the one that suffered the most.
Since January 2014, Russian rouble lost approximately
50% of its value against the US dollar. The effect has
been amplified by the sanctions imposed by western
countries on Russia and further exacerbated by a
successive collapse of the oil price.

In 2014 The Economist reported that the oil price

fell by more than 40%. The collapse of the oil price
appears to be the most important reason behind
Russian Crisis, resulting in a severe shortcut of trade
revenue forcing it to start considering austerity
measures to avoid draining its rainy-day funds used to
cover shortfalls in the budget (Spence, 2016). Figure
A demonstrates a positive relationship between Brent
crude oil price and the value of Russian rouble in
terms of USD.
Another reason behind the crisis has resulted from
Russia`s conflict with Ukraine, causing the EU and
the USA to impose economic sanctions, which have
caused uncertainty and encouraged a significant
outflow of capital from the country. There are three
types of sanctions that were imposed on the economy,
each playing its negative role. Firstly, a significant
restriction on access of Russian national state
companies and banks to the world financial markets
(Gilmundinov, 2014). According to Kahn, given the
high external debt of Russia, a rapid deleveraging of
Russian financial institutions could cause losses for

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FINANCIAL STRATEGY

Russia and its external investors.

Secondly, sanctions imposed restriction on access
of Russian companies to some foreign technologies.
For example, due to Russian backwardness in the
horizontal drilling, an embargo implemented on
export of some designated high-technology in oil
exploration could have a negative effect even in the
long run. Thirdly, sanctions also imposed restriction
of the embargo on dual-use goods and military
equipment designated to Russia (Review, 2015).
As a result, the problem of increasing capital flight
and further accelerating inflation growth raised. The
slumps of crude price leads to Russian a tougher
international trade environment and stark decrease in
trade revenue. Both factors lead to decrease demand
for Rouble and increase supply of Rouble in the world
market.

Further influences

The Russian Crisis is posing a major threat to nine

countries, along its southern fringe, whose economies
rely heavily on remittances- billions of dollars shipped

Mar-Apr 2016

by their citizens working in Russia. The drop in Rouble

value has not only decimated the value of remittances
sent home by workers from Caucasus and central
Asia, but is discouraging migrants from staying work
in Russia and could lead to political unrest.
According to Guardian (2015) About 40% of
remittances to Armenia, Georgia, Moldova and
Ukraine are from Russia, rising to 79% for Kyrgyzstan.
which in turn causes a devaluation of the currencies
of those countries. The most vulnerable countries
are Kyrgyzstan, Tajikistan and Uzbekistan where
the economies and political systems are in large
proportion backed up by the money from its nation
working in Russia (Walker & Nardelli, 2015). If all
these people return it will cause a social explosion. In
Uzbekistan, ageing dictator Islam Karimov said there
is little work in Uzbekistan, where 100 per month is
considered a good salary and many towns simply do
not have any opportunities to work at all. According
to regional experts, if the money flow from migrant
labourers dries up, rulers like in Karimov would get
into serious trouble.

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