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Assessing Impact of a Future Development on Market Performance The Effect of the Discovery of Synthetic Oil on the Russia, South Africa & China markets Go Isobe Takuro Minami Benjamin Carrion Schafer Johan Westblad
The Discovery of Synthetic Oil ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Economic Impact ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Geopolitical Impact ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Social Impact ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Technological Impact ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Economic Facts
World Energy Sources ,[object Object],Source:  Energy Information Administration Annual Energy Review 2008
Figures and Facts Rank Consumption Production Export Import 1 United States Saudi Arabia Saudi Arabia United States 2 China Russia Russia Japan 3 Japan United States Norway China 4 India Iran Iran Germany 5 Russia China United Arab Emirates South Korea 6 Germany Canada Venezuela France 7 Brazil Mexico Kuwait India 8 Saudi Arabia United Arab Emirates Nigeria Italy 9 Canada Kuwait Algeria Spain 10 South Korea Venezuela Mexico Taiwan 11 Mexico Norway Libya Netherlands 12 France Brazil Iraq Singapore 13 Iran Iraq Angola Thailand 14 United Kingdom Algeria Kazakhstan Turkey 15 Italy Nigeria Canada Belgium
Cumulative Oil & Gas Wealth Transfer International Energy Agency IEA
IAPM E[r i ] = rf + β iw  x (E[r w ] – rf) + ΣSRP j  x γ j Assumption: PPP holds in the long run estimate    FX risk premium =0
Impact of Synthetic Oil Discovery on Russia China South Africa
Economic Overview ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Economic Impact Indicators Description Initial impact Market surge as the economy can grow further with synthetic oil  Currency Unlikely to discontinue currency pegging Correlation with world portfolio Higher Volatility Less Beta Closer to 1.0 (from 1.07) Integration Higher  Subsequent impact More integrated to the world equity market
Initial Impact ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Medium Term Impact ,[object Object],[object Object],[object Object],[object Object],β China World  = ρ China World  x σ China  / σ  World
Medium Term Impact E[r China ] = rf + β China World  x (E[r World ] – rf) = 3.69% + 1.0 x (7.67% - 3.69%) = 7.67%  (down from 7.95%)
Economic Overview ,[object Object],[object Object]
Economic Impact South Africa Initial impact Positive impact as an oil importer Currency Appreciated with less import of oil (better positive current account) Correlation with world portfolio Remain high Volatility Less Beta Closer to 1.0 Integration Remains high Subsequent impact Due to the big coal/energy economy, there may be some lag to catch up with the improvement .
Initial Impact  on South Africa ,[object Object],[object Object],[object Object],[object Object]
Medium Term Impact β SA World  = ρ SA World  x σ SA  / σ  World ,[object Object],[object Object]
Middle Term Impact E[r SA ]  = rf + β SA World  x (E[r World ] – rf) = 3.69% + 1.23 x (7.67% - 3.69%) = 8.59%  (no notable change)
Economic Overview ,[object Object],[object Object],Russian market index (RSX) vs. S&P GSCI Crude Oil Total Return Index ETN
Economic Impact Indicators Description Initial impact Market downturn as the economy heavily depends on oil/ gas Currency Huge devaluation (sell of Russian assets by foreign investors) Correlation with world portfolio Lower Volatility Higher Beta Lower than 1 (1.71 to 0.5) Integration Lower  integration (ADRs disappear), capital restrictions, political and social uncertainties.  Subsequent impact After the downturn risk mostly lies in geopolitical and other diversifiable risk.  Rubble depreciation makes exports cheaper, but industries not competitive
Medium Term Impact ,[object Object],[object Object],[object Object],E[r Russia ] = rf + β Russia|World  x (E[r World ] – rf) = 3.69% + 0.5 (7.67% - 3.69%) = 5.68% (down from 10.5%)
Schafer, Westblad, Minami, Isobe (2010) ,[object Object],[object Object],[object Object],[object Object]
 

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Global Markets

  • 1. Assessing Impact of a Future Development on Market Performance The Effect of the Discovery of Synthetic Oil on the Russia, South Africa & China markets Go Isobe Takuro Minami Benjamin Carrion Schafer Johan Westblad
  • 2.
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  • 9. Figures and Facts Rank Consumption Production Export Import 1 United States Saudi Arabia Saudi Arabia United States 2 China Russia Russia Japan 3 Japan United States Norway China 4 India Iran Iran Germany 5 Russia China United Arab Emirates South Korea 6 Germany Canada Venezuela France 7 Brazil Mexico Kuwait India 8 Saudi Arabia United Arab Emirates Nigeria Italy 9 Canada Kuwait Algeria Spain 10 South Korea Venezuela Mexico Taiwan 11 Mexico Norway Libya Netherlands 12 France Brazil Iraq Singapore 13 Iran Iraq Angola Thailand 14 United Kingdom Algeria Kazakhstan Turkey 15 Italy Nigeria Canada Belgium
  • 10. Cumulative Oil & Gas Wealth Transfer International Energy Agency IEA
  • 11. IAPM E[r i ] = rf + β iw x (E[r w ] – rf) + ΣSRP j x γ j Assumption: PPP holds in the long run estimate  FX risk premium =0
  • 12. Impact of Synthetic Oil Discovery on Russia China South Africa
  • 13.
  • 14. Economic Impact Indicators Description Initial impact Market surge as the economy can grow further with synthetic oil Currency Unlikely to discontinue currency pegging Correlation with world portfolio Higher Volatility Less Beta Closer to 1.0 (from 1.07) Integration Higher Subsequent impact More integrated to the world equity market
  • 15.
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  • 17. Medium Term Impact E[r China ] = rf + β China World x (E[r World ] – rf) = 3.69% + 1.0 x (7.67% - 3.69%) = 7.67% (down from 7.95%)
  • 18.
  • 19. Economic Impact South Africa Initial impact Positive impact as an oil importer Currency Appreciated with less import of oil (better positive current account) Correlation with world portfolio Remain high Volatility Less Beta Closer to 1.0 Integration Remains high Subsequent impact Due to the big coal/energy economy, there may be some lag to catch up with the improvement .
  • 20.
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  • 22. Middle Term Impact E[r SA ] = rf + β SA World x (E[r World ] – rf) = 3.69% + 1.23 x (7.67% - 3.69%) = 8.59% (no notable change)
  • 23.
  • 24. Economic Impact Indicators Description Initial impact Market downturn as the economy heavily depends on oil/ gas Currency Huge devaluation (sell of Russian assets by foreign investors) Correlation with world portfolio Lower Volatility Higher Beta Lower than 1 (1.71 to 0.5) Integration Lower integration (ADRs disappear), capital restrictions, political and social uncertainties. Subsequent impact After the downturn risk mostly lies in geopolitical and other diversifiable risk. Rubble depreciation makes exports cheaper, but industries not competitive
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