Bollywood Investment Conference

And you thought Bollywood is just for fun and entertainment. Legendary Bollywood actors and actresses have words of wisdom that can help professional fund managers and investors alike. After all, investment is art as much as it is science. Hence, there is no shame in taking some cues from film artists!

The conference will focus on five important investment themes viz., Investment Strategy & Financial Planning, Stock Selection, Role of Advisors, Risk Management and Ethics. Present day celebrities, yesteryear stars, and even dead Bollywood legends will spring to life and deliver masterpieces from their movies to investors and fund managers.

Before the formal sessions begin, there will be a conference flag off. You guessed it right, an item number by Shah Rukh Khan and Bipasha Basu! No Bollywood event ever happens without a Shah Rukh Khan dance.

There will be no Q&A after the sessions since Bollywood actors can only play pre scripted roles, and cannot react to sudden questions.

Investment Strategy and Financial Planning

The opening session will be star-studded with 6 leading actors (living and dead!) sharing their views and ideas on investment strategy and financial planning.

Amjad Khan will kick start the session with his famous dialogue from Sholay “Only one man can save you from Gabbar’s anger; only one man…Gabbar himself”. He is politely asking you as an investor to take responsibility about your savings and be accountable. At the heart of any good strategy is its simplicity which Hrithik Roshan expounds through his Kaho Na Pyaar Hai dialogue “beauty lies within simplicity”. The podium will then be shared by the legendary Raj Kapoor and Dilip Kumar, who will explain to the audience the importance of portfolio diversification. Raj Kapoor’s Shree 420 lines “My shoes are Japanese, these pants are British, I have a Russian red hat on my head…but still my heart is India” will explain diversification even to a layman, while Dilip Kumar’s hard-hitting dialogue from Karma “To protect his cubs, a tiger does not need wild dogs” advises us to keep it simple, and protect one’s portfolio with a little bit of smart diversification.

Anil Kapoor and Hrithik Roshan will then dwell on the timing aspect of the investment strategy. In Jodha Akbar, HR says “There is a big difference between winning and ruling”. Winning is a short term gain, while ruling is a long term perseverance. Investment world will provide you with countless short term winning opportunities but the trick is to convert them to long term growth and stability. In other words, don’t be short term focussed. And Anil Kapoor is there to warn you about bad timing, just like he did in Masafir, where he said “Whether the policemen are real or fake…bloody, they always comes late”. Farhan Akthar and Madhuri Dixsit will end the session with some sage advice. FA will motivate you to have conviction, like when he said in Luck by Chance “keep walking on your road, keep on walking… and slowly the whole world will come on your road”. So what if you make mistakes, are we not here to learn from it? These parting words will come from Madhuri Diksit, “Every sorrow is the beginning of a probable happiness…and every loss is an indicator of an upcoming profit” (Devdas). Life is a cycle; cut your losses, learn your lessons, and work towards your inevitable profit!

Stock Selection

The next session is lead by the don of all dons, Amitabh Bachan, who along with 5 others will give you some tips on stock selection. They will dwell on complicated concepts like valuation, volatility, behavioural finance, and even luck!

In deference to his stature, the senior Bachan will take the floor to extoll the virtue of saying no. “To make progress in this world…it is very important to say no” (Agneepath). This is especially true during bubbles when stock valuations reach dizzy levels. It is during times like this you should be able to say no. In stock selection there are some dos and don’ts. Govinda (Deewana Mastana) will encourage you to have patience, “This world is a bus stop and a girl is a bus. If you run behind it then you will miss it, but if you stay in the same place then another one will come from the front”. Jackie Shroff (Farz) will reinforce the importance of patience “The fun of hunting comes only when…the prey does not get captured quickly”. The don’ts will be driven home by Dharmendra (Yamla Pagla Deewana 2), where he will explain the behavioural finance concept of not getting emotional in your stock selection, “How many times have I told you…have fun, but don’t fall in love”. The junior Bachan (Abhishek) will take the discussion to a more technical level where he will emphasize on the contrarian theory (When people are talking against you…then you are making progress-Guru) and volatility (Every hurdle…is a chance to get to the destination-Sarkar Raj).

 In case you thought stock selection is all about skill, Jackie Shroff is here to explain the role of luck as well “Sometimes luck comes before death”.(Farz)

The Role of Advisors

Bollywood actors are very much used to the concept of advisors, and hence can succinctly explain their importance while making investment decisions. This short session will be anchored by three people, led by Hrithik Roshan “I will never leave your hand…not today, not now, and not ever” (Aap Mujhe Achhe Lagne Lage). This is exactly what every financial advisor should swear to his clients! Dilip Kumar (Saudagar) will emphasize the point further “A right is not asked with head bowed down…but with the head held up”. As a client you have every right to question  your advisor, until you are satisfied with the answer. And don’t be a Dharmendra from Sholay who said “we work only for money”. A financial advisor should never give such a feeling to his/her clients.

Risk Management

“To live life there are only two ways…one whatever is happening let it happen, keep tolerating it..or else take responsibility to change it” (Rang De Basanti). Aamir Khan will take the floor on risk management with this opening. While risk management is hard work, it eventually pays off. Jackie Shroff in Border did tell viewers “The more you sweat in peace…the less you bleed in war”. Prepare and position your portfolio from a risk perspective, so you bleed less during a financial crisis. And what is the consequence of ignoring risk management. “In trying to achieve a lot a human sometimes loses everything”. Govinda in Andolan is not talking about ponzy schemes!

Ethics

From a grand start of 6 in the opening session, the last session will have only two doyens speaking about ethics, as most of the attendees eagerly await the close. “Rather than living under the roof of humiliation…it is better that a person lives without any roof, but with respect intact” (Khudgarz). Jeetendra is simply driving the point that ethics in investment world will ensure no humiliation at all times. Dev Anand (Johny Mera Naam) will give us the thumping end by screaming “I can sell the moon for you…but not my honesty”.

Closing Session

The conference will end with the screening of a yet to be and never to be released movie “Black money, Bollywood and Switzerland!”

The Mega Rupee Strength!

During the last 15 months, Euro fell by nearly 25%, Brazilian Real by 30%, Russian Ruble by 50% and Canadian dollar by 18% all against the USD. The INR is down only by 2%!

My previous article on Indian rupee was written during August 2013 titled “The Mega Rupee Slide” when Indian Rupee (INR) was sliding down as if there was no tomorrow. The question back then was, how low the INR will go and how can this be stopped.

Within two years, that question is now flipped over its face. This time around, the motivation to look at INR was for the opposite reason. When almost all global currencies are sliding down against US Dollar (as if there is no tomorrow!), INR is holding up quite well.

This indeed is a very strange situation for an emerging market like India. Can this hold up or Is this just a calm before the storm? This question is important for CFO’s, Foreign Investors, Importers, Exporters and finally NRI’s.

Depreciation Relative to USD	2014	2015-YTD (18th Mar)
Brazilian Real	-11.1%	-18.4%
Euro	-12.0%	-12.4%
Canadian Dollar	-8.6%	-9.3%
Australian Dollar	-8.4%	-7.1%
South African Rand	-9.7%	-6.6%
Indonesian Rupiah	-1.8%	-6.0%
Malaysian Ringgit	-6.2%	-5.7%
Russian Ruble	-43.3%	-5.4%
Singapore Dollar	-4.7%	-4.7%
Mexican Peso	-11.6%	-4.2%
Korean Won	-4.0%	-3.2%
Japanese Yen	-12.0%	-1.3%
Chinese Yuan	-2.4%	-0.5%
Hong Kong Dollar	0.0%	-0.1%
Thai Baht	-0.7%	0.0%
Taiwanese Dollar	-5.7%	0.2%
Indian Rupee	-2.0%	0.6%

But before we answer that question, let us understand what has caused this rapid USD strength against Euro and other currencies. Euro has plunged by nearly 25% since 2014 beginning from 1.4 to nearly 1. The simple explanation to this unprecedented plunge of Euro is the divergent monetary policy of US and Eurozone. US is now in a tightening mode (means increasing the rates) while Eurozone is now in a loosening mode (means reducing the rates). So, when US rates go up and Eurozone rates fall, the spread widens and therefore causes more capital to flow back to US in search of more yields which then results in currency appreciation.

Why is INR so strong?

There are many reasons, but three stand out:

      1.       “Strong”  and improving Economy

      2.       “Prudent” RBI &

      3.       “Rocking” Capital markets

 “Strong” Economy:

“India’s near-term growth outlook has improved and the balance of risks is now more favorable, helped by increased political certainty, several policy actions, improved business confidence, lower commodity import prices, and reduced external vulnerabilities” IMF, March 2015. That is a neat summary of where India is in terms of its economy.

Economic Indicator	2014/15	Current Assessment	Future Assessment
Real GDP growth (%)	5.6	Rebounding	Positive
Inflation (%)-CPI	6.7%	Reducing	Stable
Current Account Deficit (% to GDP)	-1.8%	Narrowing	Stable
Fiscal Deficit (% to GDP)	-4.4%	Declining	Declining
Forex Reserves ($b)	340	Strong	Strong
Public Debt (% to GDP)	64.3	Moderate	Moderate
Data Source: IMF

India is among very few countries in the world that is expected to clock decent real GDP growth for 2015 and beyond. IMF projects a growth of 5.6% for the current fiscal and 6.3% for the next fiscal, a healthy number indeed. The rebound in growth is happening on the back of improved political climate, lower oil prices, increasing confidence among business and investors, and reduced external vulnerabilities as IMF summarized. However, if you look at the projections for say 2019/20, it still remains only at 6.7%, not the 10% that the media loves to tout all the time. If India’s medium-term prospects were to be improved, we should focus removing supply-side bottlenecks.

The reduction in consumer inflation is commendable and timely. The reducing inflation is credited mainly to lower oil prices though RBI’s relentless pursuit to contain inflation is finally paying off through its monetary policy actions. The government’s effort to contain food inflation is also a key contributor here.

India also suffers from the twin deficit problem i.e., fiscal deficit and Current Account Deficit (or what is popularly called CAD). CAD is now at -1.8% of GDP, far lower than -4.7% witnessed during 2012/13. The improving situation is mainly because our import bills are coming down while exports have picked up. Imports have come down mainly due to lower oil prices as well as fall in gold imports (thanks to higher import duties and administrative measures). India has received an unexpected gift in the form of lower oil prices translating into lower import bill. Oil comprised nearly 40% of our import bill before the oil price collapse and hence it is a great relief to be experiencing a lower oil price. But, we do not know how long this gift will last. Future assessment of CAD is also very stable at -2.5%.

Presently India’s fiscal deficit stands at -4.4% showing a declining trend relative to history. As per IMF, it is further poised to reduce though the task is one of great challenge. The fiscal deficit can be reduced only if we increase the revenues or decrease expenditure or do both. Reducing expenditure will involve overhauling the subsidy regime mainly to stop leakages in food subsidies. Improving revenues will involve tax administration reforms.

Our forex reserves at $340 billion is increasing and provides decent cover for our imports (7 months). The growth in our forex reserves is happening on the back of strong FII inflows and narrowing CAD. This is further augmented by NRI deposits and overseas borrowing by corporates through ECB’s. Indian corporates are highly leveraged and normally unhedge their forex exposure. If you notice carefully, all these sources are short-term and volatile. India should look to building its forex reserves through long-term stable forms like FDI. A good comparison here would be China whose forex reserves are close to $4 trillion dollars mainly built on the back of export surpluses. Due to this, China in fact enjoys a current account surplus.

India’s public debt as a % of GDP is about 65% and is considered moderate compared to other countries. Moreover, our total debt is about 135% of GDP (Government: 66%, Corporates: 45%, Households: 9% & Financial Institutions: 15%). Contrast this with say China at 282% of GDP (Government: 55%, Corporates: 125%, Households: 38%, & Financial Institutions: 65%). China’s total debt has grown four times in the six years since global financial crisis and its debt-to-GDP ratio has doubled between 2007 and 2014 according to an analysis done by C.P. Chandrasekhar and Jayat Ghosh and as published recently in Business line. Even though the aggregate debt level for China is high, its current account surplus can weather any storm, while India does not have that luxury. That said, Indian public debt scenario is highly sustainable with favorable maturity structure, currency composition as well as domestic investor base according to IMF.

 “Prudent” RBI

Raghuram Rajan is arguably one of the deft Central Bank governors in the world today. When the new Modi government took charge, one of the best decisions they made is to retain him as the governor of RBI. RBI’s main mandate is to contain India’s uncontainable inflation and he managed to do that exactly, though with a little bit of help from oil price. However, he did not wait for the “lower inflation” thesis to play out fully before decreasing India’s interest rates. He surprised the market with a 25 basis point cut on March 4. Remember, our interest rates are high in response to high inflation and this has been touted as one reason for economic growth not picking up. In other words, many were blaming Raghuram Rajan as obstructing and delaying India’s economic growth. He surprised many when he made a sudden announcement to increase the rates. It shows his conviction that the reduction in India’s inflation is here to stay.

 “Rocking” Capital Markets

A strong capital market attracts foreign investments which contributes to rupee strength. Indian stock market is one of the best performing stock markets in the world. It netted a return of 30% for 2014 and is up by 3% so far in 2015. Strong capital inflows, optimism about reforms by the new Modi government, proactive RBI and huge expectations of infrastructure spending augurs this strong performance of the stock market. Foreign investors are also eagerly buying Indian debt. As markets perform well, the foreign inflows will tend to appreciate the currency and this can be one reason as well. However, Indian markets are not cheap as measured by price to earnings ratio at 17.8 for MSCI India based on forward earnings, which is nearly 25% higher than the long-term average. Valuation can get affordable only if earnings catches up.

What can spoil the party

Two things can spoil the party in my assessment:

      1.       Global market volatility &

      2.       Anemic credit growth magnifying NPA problem

Global Market Volatility:

Everyone from Raghuram Rajan to Arun Jaitley (India’s Finance Minister) is bracing for the “winter” in global financial markets when US Fed will start raising interest rates after a prolonged period of low interest rates. The question is no longer “if” but when. And the rate rise can start either as early as June or at the worst by the end of the year. When US did a “taper tantrum” last time around in 2013, every emerging market felt the heat including India. This time around this event of rate rise is even more powerful than “taper tantrum”. Given the negative yields in Eurozone, a rate rise in US is definite to pull back capital to US. This means hot money will leave the shores of other markets (especially emerging markets) in search of more yields in US. Indian markets are predominantly served by hot money and hence it may have a chilling effect for sure. Let us hope that the policy normalization is not disorderly and inflicts minimum pain for India.

Anemic Credit Growth

The other major concern is the huge swathe of non-performing loans building up in public sector banks coupled with weak credit growth. Accordingly to IMF, the profitability of public sector banks remains weak, due to lower operating efficiency. Large exposure of these banks to infrastructure has turned their asset quality very poor. Due to this, the capital requirements for public sector banks has increased. Basel 3 adoption also increases this pressure. Weak credit growth (at 10%) may not help matters.

Concluding Thoughts

INR is currently trading at Rs.62/USD. Leading investment banks mostly predict Rupee to continue to be strong in 2015 as we can see in the table. While Nomura call is aggressive at Rs.57.5/$, Goldman Sachs predicts INR to reach Rs.63, not too different from the current levels.

	INR Forecast -2015-per USD
ZyFin Research	58
Bloomberg survey	61
Nomura	57.50
Deutsche Bank	64
BoA Merril Lynch	60
Goldman Sachs	63
Reuters poll	62.50

The rapid rise of US dollar and the concurrent rapid fall of Euro surprised many analysts. However, what is even more surprising is the strength of Indian Rupee. This may well reflect the solid Indian economic story. However, currency is a volatile game and few can predict its movement accurately. Among the key risks discussed, IMF flags a surge in financial market volatility as the highest risk for India in 2015 apart from protracted period of slower growth in advanced economies. Hence, it is quite clear that the storm is coming. The question is how well we can cope with it. When that storm arrives, the Indian Rupee should give up and move down to say 65 or even 70 levels if the Fed monetary policy unwinding is orderly. The role of RBI is to make sure that this downward movement of INR is orderly and does not create panic among market participant. Given Raghuram Rajan’s track record so far, it is quite to be expected that he will manage the process well.

YOU ARE DOOMED, IF YOU HAVEN’T USED THESE TERMS!

This article was published in Market Express

Context: The other day we had a meeting with an economist from a leading investment bank. The meeting room was full with senior management people. He explained why global economy is going through a paradigm shift though with a goldilocks situation. He argued that US pension problem is acute due to baby boomers and can be punctuated by the “new normal” economy that will lead us to a low-return world. His back of envelop calculation shows that it will be difficult to generate inflation in US and therefore he is cautiously optimistic about the whole thing. He said that Obama and Janet Yellen should come up with some out of box thinking to wriggle out of the situation. He said that the good news is that there are solutions to problems while the bad news is that the leadership is not aware of it!

Jargons matter, whether you understand them or not! You got to be using some terms if you have to signal that you have finally arrived within the top management circles in your organization. The usage of these words/terms can be either in your presentation, oral arguments, or in your written notes. But they have to be there for people to take you seriously.

Let us run through them quickly!

      1.       Paradigm Shift: Honestly, I know what a shift is. But why this use of paradigm all the time. In simple terms, it means things have changed for good. Hence don’t keep harping the old logic. In complicated terms paradigm means “A distinct set of concepts or thought pattern, including theories, research methods, postulates, and standards for what constitutes legitimate contributions to a field”. Now, you know what I mean.

      2.       Goldilocks: I initially thought that it refers to something related to gold. But the lock thing confused me a bit. The Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes. From an economic perspective, it is defined as moderate growth with low inflation (not too hot or too cold). I still don’t get it.

       3.       Baby boomers: Whenever I see this term, I used to think that they refer to “baby” related issues. On the contrary, it refers to all the old people born during the post-world war 2, precisely between years 1946 and 1964. (No, I am not a baby boomer).

      4.       Devil’s advocate: You should use this term, if you want to oppose someone but do not want to offend him. You deliberately take an opposing view in order to give a critical balance to a debate or to explore the thought further.  Unfortunately, compliance officers and risk managers always advocate for the devil.

      5.       Outside the box: It means don’t give the same old crap. Think differently, say differently though you may act the same. People love crazy stuff and outside the box thinking is exactly what it is. If you have to say something completely different, but afraid of a backlash, simply take refuge behind this term and you will be alright.

      6.       Multitasking: It means, you cannot get away by just doing one thing at a time. The boss will ask you several things and expects you to do all of them all at the same time. Sometimes, it may help to have more than 2 hands since you may have to type five letters at the same time. While recruiting someone, this can be a clincher.

      7.       New Normal: This refers to anything that is not old normal but beyond that, we do not know what it means. It can mean that old things will never come back. Or it can mean that new things will stay forever from this point forward. Bad situation to someone who trusts and relies on past to make a living. (Did I mean equity research?)

      8.       Back of envelop: It normally refers to estimates that are not backed by any logic or reasoning. Even though you have access to a large note book or ipad, you should still grab an envelope to write your stuff on its back, so that nobody holds anything against you. Sometimes, back of envelop calculation can also be right.

      9.       Cautiously Optimistic: If you are a research analyst and you do not know this term, you better change your profession. This is a classic term to say and not mean anything. How about being “carelessly pessimistic”

      10.   Good news/Bad news: Choosing to tell good news over bad news or vice versa is an excellent management jargon that make you appear very organized in your thought. Sometimes you can say a bad news as a good news and confuse the listener since his orientation is more on classifying what is good or bad rather than digesting the news itself. Helps a lot in ugly situations.

Investing in Peaks-What are the odds?

So, here is the question. Should you invest in Indian markets when Sensex is at its all-time high? What are the odds that you will make money from this point forward?

It is quite common sense to avoid investing in peaks and invest during troughs (when market hits a bottom). However, this is easier said than done. What if the market is in a secular bull run? Are we not missing an opportunity to make money by not investing just because the market is at an all-time high?

Ironically, markets come to investor attention only when they touch all-time highs. But all time high is also the point where prospective returns are diminished considerably. A look at Sensex from 2005 to 2014 (10 years) says that it provided an annual return of 15%, sufficient to be attractive even if you factor inflation into the equation. However, this assumes that you invested at the beginning of 2005 and never looked back, an assumption that is not easy to make. When markets are in peak, investor sentiment is also at a peak encouraging one to invest. Also, peer pressure to perform also increases as you see your friends and colleagues making money (or at least boasting to be making money). 

Alternatively, when markets are in a trough, fear factor will rule and may force you to cash out earlier instead of investing.

We ran a simple number crunching exercise to differentiate the effect of investing in a peak as opposed to investing in a trough for the Indian market. However, we need to formulate some rules to test the case. Here are they:

       1.       As an investor, we expect to make an annualized return of 15% (approximately the return Sensex gave during the last 10 years. This is our target return.

      2.       Our holding period is a minimum of one year since we are not in a trading environment where we buy today and sell either today or tomorrow for a 0.2% return in a day. Annualized, this can be equivalent to making or losing 65%!

      3.       A PEAK is defined as an all-time high that we have never seen before (quite easy to spot as well). For e.g., the current Sensex level is an all-time high.

      4.       A TROUGH is any point 15% lower than a latest peak. (The 15% is subjective and is set to align with the long-term performance of Sensex)

Here are the results:

During the ten year period (2005-2014) Sensex produced 220 peaks (all-time highs) out of which 165 happened before Jan 1, 2014 (since we have a one year holding restriction!). Out of 165 peaks, 129 hit the target return of 15% with an average holding period of 252 days (one year in terms of trading day’s calendar). In other words, 78% of the time you would have achieved your target return of 15% exactly within one year of holding period even when you invest in a peak. So, what happened to the balance 22% of the time? The holding period for them is 1,742 days (approximately 7 years) and still counting!

In the same ten year period, we had 902 troughs out of which all of them are more than 1 year old (remember we are in a bull market for the last few years). In all of the trough cases, we achieved our target return of 15% within one year holding period. In other words, the odds of not making 15% target return when investing in a trough is NIL.

In other words, when you invest in a peak there is a 22% chance that you may have to wait endlessly to make a 15% annualized return. While when you invest in a trough, there is no such risk. The question now is, is the 22% risk of being caught in a peak trap worth taking? It depends on your risk appetite.

Amazingly, Indian markets have provided far more troughs than peaks! Troughs outnumber peaks 4 to 1. So why not wait for the trough rather than getting sucked up in a peak. While the odds of being on the wrong side of a peak investment is just 22%, when you are the odd man out in that group, your waiting time to realize your target return can sometimes be endless (ask a Japanese!).

PS: The author thanks Rajesh Dheenathayalan for his assistance.

Drop in Oil Price Is Structural Not Cyclical Says Fereidun Fesharaki

This article was originally published on the website of CFA Institute

At the 2015 CFA Institute Middle East Investment Conference, energy expert Fereidun Fesharaki presented a grim picture of the global energy markets. Against a backdrop of volatile energy prices, the founder and chairman of FGE discussed the changing energy landscape and argued that the recent major drop in the oil price is structural rather than cyclical, adding that he expects a rebound in the oil price only in 2017/18. He believes this structural shift is good news for the global economy but bad news for oil exporting countries.

The Structural vs. Cyclical Debate

Fesharaki’s main argument was that oil price change is structural because of the way the United States has transformed as an energy producer during recent years with very few people noticing. He explained that while the United States was producing between 4.5 and 5 million barrels per day (mbd) 2 to 3 years ago, today it is producing an additional 4.5 mbd, which is more than Kuwait at 3 mbd. In the liquefied natural gas (LNG) space, he said the United States is now among the top three exporters, while just three years ago it was importing LNG. And the same goes for propane, an important fuel in the energy system, he added. Qatar, Abu Dhabi, and Kuwait were the top three producers of propane about three years ago. Currently, US production of propane is larger than the three countries combined. Fesharaki argued that with the increasing US dominance in the energy sector, it is clear why the price adjustment is structural rather than cyclical.

Estimating the Likely Oil Price

Assuming no new dramatic geopolitical events, Fesharaki stated that he expects a price rebound in 2017/18 and that it will not be anywhere close to $100 per barrel but may be more like $70. For 2015, he expects the price of oil to be $5 more than it is now. He believes the oil price will be volatile with a $20–$30 swing in prices.

Fesharaki said that a steady and stable $100 per barrel during the last few years has made people assume that this is the norm, which has led to extraordinary investments in energy. Meanwhile, he continued, while supply steadily increased, thanks to the United States, Iraq, and Canada, demand continues to be muted. He added that Asia’s demand is 50% lower today than three years ago, as some of the Asian countries (such as India and Indonesia) made the most of low oil prices and removed subsidies that enabled a straight pass through, which created a demand rebound.  Fesharaki said that the Middle East used to experience one of the highest demand growths, thanks to a young population, low prices (subsidies), and lots of cash. Now he believes that things have changed for the worse in the region and that most of the GCC countries are on track to pull back subsidies (except Saudi Arabia).

The Saudi Strategy

The announcement that Saudi Arabia will not lower production has ignited the current oil price collapse, Fesharaki said. He thinks this is not a political decision but an economic one that has political consequences. Saudi Arabia knows the importance of being a credible political powerhouse rather than an oil powerhouse, he added. Fesharaki believes that Iran provided them with an important lesson: After sanctions, Iran lost about 60% of oil exports and became politically irrelevant. So, he contended, defending market share is more important than defending price in order to be politically relevant. Before changing course, he said, the Saudis will now await new evidence, which may come by the end of 2015 or early 2016.

Final Thoughts

Fesharaki argued that at $40 per barrel (which is $15 lower than the current level), nearly 70% of oil producers in the United States will stop production. He believes we might see this price point somewhere in the second quarter, due to contraction in demand by about 2 mbd. At this price point, he concluded, investors of expensive oil (read shale oil) will reconsider.