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Political Economics
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O Canada!

Two weeks ago, the London Stock Exchange struck a deal with TMX Group, the operator of the Toronto Stock Exchange. The deal looks likely to reduce costs for users, offer greater levels of liquidity and provide broader access to mining and natural resources stocks.

For investors, this is particularly attractive at a time when commodity prices are front page news and exploration activity continues to thrive worldwide. Mining and energy companies account for 34 per cent of the LSE’s FTSE 100 index at the moment and interest amongst investors continues to grow.

Canada has become a more attractive proposition for foreign investors since its relatively strong performance during the credit crisis. Although the region still felt the effects of the global crisis, it has since been widely acknowledged that Canada emerged in a stronger position than at the start of the recession, particularly in the banking and financial sectors.

Major multinational companies are also improving Canada’s investment prospects for retail investors and putting their money where their mouth is. For example, the Canadian natural gas producer EnCana (listed on the Toronto Stock Exchange), made the news recently, after it was announced that PetroChina, China’s largest oil and gas producer, had paid $5.4bn for a 50 per cent stake in EnCana-owned shale gas deposits.

This is just one example of the way in which Canada is increasingly on the international investor’s radar.

In fact, a large portion of the Canadian economy is now open to foreign investment, something that has not always been true. Statistics Canada notes that the Canadian economy has undergone economic cycles that have changed the country’s ability to attract foreign investment. Currently, 22 per cent of business assets are owned by foreign investors and they receive 30 per cent of the profits.

For international investors, things in Canada are looking up.

Visit our International Trader page to learn more about the Canadian markets that we offer.

Libya - What does it mean for investors?

Two weeks ago we wrote about the political unrest in Egypt and the potential impact for investors.

In our Investment ViewPoint: Comment – Unrest in Egypt, we mentioned the potential for a domino effect and a fortnight later, the situation has developed at alarming pace. Since the Tunisian and Egyptian populations rose up against their governments, a wave of protests has swept the Middle East, extending to Bahrain and the North African countries of Libya and Morocco.

In Bahrain, despite some initial scuffles, the protests appear to have been resolved peacefully. However, the situation in Libya has some darker undertones, as reports of violence against protesters continue to emerge.

From an investment perspective, there are important consequences of the ongoing events in Libya. Both gold and oil prices have risen substantially and there has been a negative impact on equity markets, particularly those of some European countries with a large exposure to Libya. One example here is Italy, a country with considerable cross-investment with Libya, not least the Italian oil giant Eni, which pumps out almost 250,000 barrels a day. This accounts for almost 15% of the country’s oil production.

What does it mean for oil?

Let’s look at the reason oil is so heavily impacted by this situation. Libya is a leading oil-exporter (12th largest in the world) and is critical for European oil supplies. In fact, oil provides Libya’s largest export income.

Since the beginning of the political crisis, oil companies from around the world, including the likes of BP and Royal Dutch Shell, have started to evacuate their staff from Libya. With less people there to man the oil fields, the pressure on the Libyan oil supply chain is mounting. This drives up the oil price. When markets closed on Monday 21 February, the Brent crude oil price reached $109, a two and a half year high and West Texas Intermediate (a US oil benchmark) also jumped.

There will also be a knock-on effect on the price of gas and other natural resources.

What are the other effects??

In nervous times of uncertainty, investors turn to traditional safe havens, typically this is gold and, in this particular instance, oil.

Another effect is that investors tend to retreat from equities. This current situation is no different. On Monday, a US holiday, European equities in particular suffered as a result of news from Libya. Against a backdrop of concerns that the spike in the price of crude oil could accelerate inflation on a global scale and dent the chances of economic recovery, the FTSE Eurofirst 300 Index fell on Monday 21 February. This is a tradable Index which tracks the performance of European 300 largest companies.

The knock-on effect of a rise in oil prices can be significant. The potential increase in petrol and energy prices is obvious but there may be other consequences for consumers. In particular, the cost of goods and services rising to compensate for increasing transport prices. This in turn could send inflation higher, already a key concern for the global economy.

What are your options?

For any investor, it is absolutely key to stay on top of news as it progresses and to ensure that your portfolio is prepared accordingly.

Another is to acknowledge that although Libya is gripped by political uncertainty, this situation does present trading opportunities. The volatility in oil, gold and equities creates these opportunities for investors.

International Trader gives you access to 24/7 online equities trading, across 13 international markets, 21 exchanges and over 9,000 equities, perfect for the investor who wants to do their own international stock-picking. Please remember that the value of investments can fall as well as rise and you may get back less than you invested.

What investment opportunities are there in America?

For many investors, the American Dream is still alive and kicking. As an increasing number of retail investors look overseas for portfolio growth and income, the US is a common first port of call.

Many investors gain exposure to the US market using instruments such as and One extremely popular ETF is the iShares S&P 500 (IUSA), which tracks the performance of the Standard & Poor’s 500 Index, a broad-based US equity market index. Whilst ETFs are both incredibly useful and very efficient, there are also considerable possibilities in picking individual stocks.

At the beginning of February 2011, the S&P 500 reached its highest level since August 2008, buoyed by positive consumer spending and market sentiment. Those who invested in an S&P ETF two years ago would have just seen their investment recover to where it was at the time of purchase. On the other hand, stock-picking investors who researched and selected individual equities, could potentially have made a significantly better return.

On 4 August 2008, IBM shares were trading at $129. At the time of writing, early February 2011, those shares are now trading at $164. Investors who spotted this opportunity could have made a 27% increase in the value of their investment, dealing costs aside.

A less extreme example is McDonalds. In the same week in August, McDonald’s shares traded at $66. Today, the figure is $73.

There are many others that fall into the same category, that of outperforming the index, but it is important to remember that individual stock picking does not always work out positively. For example, since August 2008, shares in Yahoo have fallen from $20 to $17. This translates into a 15% loss for investors.

The key is portfolio diversification based upon thorough research in order to ensure investors are not overly exposed to any individual stock. This is all the more crucial, given that currency fluctuations too can have a significant impact on the value of overseas investments.

Another challenge for investors looking at the UK is the over-concentration of dividends within FTSE 100 companies. Of the 100 companies covered by this Index, 61% of dividend payments came from just 15 of the businesses. As a result, investors chasing yields run the risk of becoming overly concentrated in just a handful of shares. If and when a shock occurs, for example the BP crisis, this can have a disproportionately large effect on a portfolio.

This could go some way to explaining why retail investors continue to look overseas for alternative investment opportunities – there is most certainly an increased interest amongst our clients as demonstrated in a recent web poll, which  showed that 77% of our clients believe the UK will be outperformed by Europe, the US or Emerging Markets in 2011.

If you are interested in investing in international markets then find out more about Barclays Stockbrokers International Trader.

You should remember that shares can fall as well as rise in value and you may get back less than you invested.  Overseas investments may be affected by currency fluctuations which might reduce their value in sterling.

Unrest in Egypt - what does this mean for investors and the economy?

International focus has fallen on Egypt over the past week or so as unrest increases and sweeping political change looks increasingly likely.

The current uprising is predominantly driven by a young, burgeoning population reacting to what they see as a constrained social, political and economic environment. They are demanding constitutional reform.

Aside from obvious concerns for the immediate safety and wellbeing of Egyptian citizens, foreign nationals and tourists, there are also broader concerns about the political and economic impact that this situation may have in other areas. Even if the Egyptian crisis comes to a speedy conclusion, we are already seeing some short term economic effects.

Oil factor

The most immediate economic concern for the developed nations is oil, more specifically Egypt’s Suez Canal.  The canal is an integral shipping channel for the transportation of oil from the Middle East to the US and Europe.  Should the current unrest in Egypt disrupt the flow of shipping traffic, alternative routes would need to be used, increasing delivery times and costs. Just the potential that this may happen has been enough to see oil prices hit two year highs - the price of Brent Crude Oil rose through $100 per barrel on Monday 31 January.

The knock-on effect of a higher oil price can be significant. The potential increase in petrol and energy prices is obvious but there may be other consequences for consumers. In particular, the cost of goods and services can rise to compensate for increasing transport prices. This in turn could send inflation higher. As we discussed recently, inflation is already a key concern for policymakers (see our recent Investment ViewPoint:Comment –“Markets hit the ground running as the issue of inflation starts to rear its head”).

There are additional considerations for many UK companies. Tourism in Egypt has thrived over recent years, but the unrest has cut short many trips for UK holiday makers. UK tourism companies such as Thomas Cook Group (TCG), EasyJet (EZJ) and Ryanair Holdings (RYA), may be feeling the effects. Companies with key operations in Egypt, such as BG Group (BG.), will need to assess what the current situation means for their businesses.

Domino effect

The longer term concern for the global economy is the general stability of the wider region, particularly the neighbouring Middle East. For many, the real fear is that a domino effect could develop. If Egypt’s current government collapses and political reform is introduced, it may lead to neighbouring countries following suit.

Should this spread to the major economic players, then the impact on oil prices would only be amplified. The result could well be a major shift in how global economic dynamics work.

You can track the economic news related to the Egyptian situation, and the impacts on specific companies, by logging in and visiting our online Research Centre.

Investors interested in achieving investment exposure to oil may want to consider Exchange Traded Commodities (ETCs) that are designed to track the commodity.  For example ETFS Crude Oil (CRUD) is an ETC designed to track the DJ-UBS Crude Oil Sub-IndexSM.  You should be aware that the price of oil can be volatile and you may incur losses if you invest in oil-related products.  Investments in ETCs such as ETFS Crude Oil can go down as well as up and you may get back less than you originally invest. You should ensure that you read and understand the full simplified prospectus for such products before considering an investment.