A few stylized facts:
- Libya is not terribly important in itself, the effect has been priced in, most of the oil production can be replaced and sooner or later the situation will stabilize and production and exports will resume.
- The worst outcome would be a civil war and since there is a tribal division with the Benghazi in the East, this is not altogether inconceivable. Different army units seem to have defected already.
- A much bigger, and not altogether unrealistic risk is contagion to serious oil exporters, Iran, Saudi-Arabia, the Gulf states. A better barometer for that is what happens in Bahrain.
- We’re concerned, but not overly so about Saudi Arabia and the Gulf. They have enough money to bribe most of the population into submission. Iran is quite another story though.
- The downright horrible possibility of turmoil in major oil exporters will keep the oil markets spooked for quite some time, the significant risk premium on oil will not go away that easily
- Profits kept on surging right to Q4 and the markets were due for a breather anyway.
So, what does this amount to?
- We think the markets will recover from Libya in due time.
- Nervousness will stay though, keep a close eye on the Gulf and Iran. If things start to rumble there (which in a way, it already is), it could get quite nasty.
And then there is China:
- Inflation is increasing, and like everywhere, inflation hits the poor the hardest, and the poor already have reasons to be quite unhappy in missing out in the mother of all booms
- Inflation is actually good in one aspect, as it drives up China’s real-exchange rate, eating away it’s competitiveness and reducing trade imbalances in the world.
- The real worry in China is the real estate markets, and bad loans in the banking system, as there is a great deal of speculation in that sector which is driven mostly by politics, rather than straight economics. The authorities are taking measures, but whether these are enough remains very much to be seen
- China is also not entirely immune itself to political unrest, although we think that this will be a bit of a long-shot.