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5 October, 2007 11:53 PM
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Newsletter
No. 211
OIL PRICES FOCUS ATTENTION ON THE PERSIAN GULF The high prices of oil are producing a greater level of Japanese attention toward the Gulf region. The parade of Shingetsu Newsletters about new Japanese business deals in the region is one reflection of that. Foreign Minister Taro Aso’s sudden enthusiasm for an FTA with the GCC is another. The Japanese newspapers are also starting to report more on this topic. In this context, there is some interesting news: Japan’s direct dependency on Arab and Iranian oil has reached the highest levels since 1968. METI has reported that no less than 90.2% of Japan’s oil imports came from this region in 2005. At the end of the 1960s and especially after the “oil shocks” of the 1970s, Tokyo tried to diversify its sources of oil away from the region with mixed success. In 1987 this campaign reached its highest point when only 67.4% of Japan’s oil imports came from the Arab and Iranian sphere. After that, however, the movement lost steam until it finally reached last year’s figure. In 1968, the figure was 90.9%. Last year, the figure rose over 90% for the first time in 37 years. In fact, I recently attended a conference in which a senior MOFA official spoke briefly about this issue. He indicated that the Japanese government had effectively abandoned any serious effort to diversify away from the region. It probably doesn’t even matter, since, in the end, there is only one global oil market, and it may not really matter where any individual country’s oil may come from. If my understanding of this issue is correct, it seems possible that all this talk about competition to get access to oil fields by various countries may actually be rather senseless from a comprehensive point of view. Domestic oil companies may make extra money, but it doesn’t really affect energy security at a national level, which responds only to global oil prices that are the same for everyone. Whatever the case may be, Japan’s top five sources of oil are currently as follows: 1)
Saudi Arabia (29.0%)
Below is a four-part series carried by the Nihon Keizai Shinbun last December which considers the relationship between the Gulf oil boom and the Japanese stock market. The English translation has been provided by the Shingetsu Institute. OIL MONEY AND JAPANESE STOCK Oil nations in the Gulf region are enjoying unprecedented surplus increase because of soaring crude oil prices. The plentiful oil money flooded not only within but also outside the region, and part of the money is coming into the Japanese market. How are the investors in the Middle East handling the massive funds and viewing Japanese stock? This report focuses on investors from that region. The Possession Ratio Goes Up to 30% There is a Koran Museum in Manama, the capital of Bahrain. A tall man in white Arabian clothes was directing oil trade on a telephone in one of the rooms of the building which had a solemn atmosphere. The owner of the room was Mr. Tariq Kanu. After working for a London branch of the U.S. company Goldman Sacks for more than a decade, he returned to his country and founded an investment company which turns over the funds of the private zaibatsu families. Although the basis is his own family, the fund is now nearly five billion yen (about US$40 million). “The market that I’m paying attention to the most is Japan. Its economy is to being restored in earnest.” Mr. Kanu said so, but his portfolio by the beginning of this year didn’t include any Japanese stock. Anticipating the recovery of the Japanese economy, he increased his possession ratio of Japanese stocks, centering on bank stocks, to about 15% of his whole portfolio. “I’m going to increase the ratio up to 30%. It will be manufacturing that will drive future Japanese stock upwards.” He intends to change his targets accordingly. Muhammad al-Faisal, the president of the Al-Saifaliya Group, one of major zaibatsu in Saudi Arabia, said joyfully, “It was good timing.” After purchasing an investment trust of Japanese stocks in October, he gained a profit as he expected on high stock prices. “One year ago, nobody cared about Japan. However, since this summer when the stock price jumped, the royal family began asking about its stocks and real estate” (Kiichi Kato, Bahrain Branch Manager). The total oil export profits of the major Gulf region countries in 2005 is expected to be US$243 billion, which has doubled two years in a row. The local investors, who are excited about the return of 1970s oil boom, pour their abundant funds into local stock markets, and at the same time they are seeking opportunities of gaining profits outside the region. “I won’t miss initial public offering (IPO) brands.” Here is Kuwait where a construction boom is going on. Mr. Khalid al-Duhaim, who is in charge of the investment funds of the oldest investment company, Kuwait Investment Company (KIC), was no less an “IPO freak” than the Japanese day trader. “SUMCO, Internet Initiative….” When asked the IPO brands that he purchased lately, he said the companies’ names like above easily. Japan’s IPO numbers are prominent in advanced countries, and it’s not rare that those IPO brands are priced highly right after being listed. He said, “I’ve won with the strategy that I sell the stocks when the prices rise 15%.” Public Funds Also Flow In Massive investments of public funds as well as private funds have set their sights on Japanese stock. The Ministry of Investment of Kuwait is in charge of the fund investments of the Kuwaiti government, whose overseas balance in hand is over US$100 billion (about 12 trillion yen). Managing Director Badr al-Saad, who is in the number two position, said, “the Koizumi administration has advanced the reform, and the bad loans of major banks have turned the corner. I raised the investment ratio of Japanese stock in recent months that I have held for more than ten years.” Oil money doesn’t target only Japanese stock. The main target of foreign investment funds is still the U.S. They also consider China and India to be promising stock markets. They will not just crowd into Japanese stocks. Still, Japan is going to be an object of investment, for the country is drawing attention of all the Asian regions as a growing engine of the world economy and has begun proceeding toward economic recovery. The Fund Amounts to US$1 Trillion By the transfer of the wealth through high oil prices, the funds of the royal families who engage in the oil business and private zaibatsu which contracts to manage the agencies of foreign-affiliated companies are soaring in the Gulf oil nations. According to the joint investigation of U.S. firms Capgemini and Merrill Lynch, the wealthy class of the Middle East (whose funds are over US$1 million per individual) amounted to three million people in 2004. The total of their funds is US$1 trillion (about 116 trillion yen), which is up 29% compared to the year before, and showed the highest growth among all regions. They decide the distribution of stocks and bond markets of each country on their own, but generally, they leave the trade of individual stocks, etc., to Western financial agencies. The larger the funds they invest, the more likely they rely on experts. The main governmental institutions which invest public funds are Saudi Arabian Monetary Agency (SAMA), the Abu Dhabi Investment Agency (ADIA), and the Kuwait Investment Agency (KIA). The reality is that their data is not reliable except for SAMA. According to the Dubai branch of the UK’s Standard Chartered Bank, “Their overall scale and actual investment styles have many unclear points.” A Love Call to “Stable Stockholders” An IR (Investor Relations) supervisor of Elpida Memory who visited Europe in November “hung around” on the way for the first time. He visited an investment institution of a Gulf oil country. He (Executive Toshiaki Hagiwara) decided, “Considering soaring oil money, I naturally regard the institution as a possible future stock holder.” “What will become of the coordination with banks?” “What about the growth of unsecured loans?” When an IR unit leader named Yoshiaki Matsubara visited the United Arab Emirates (UAE) in July, he was asked a lot of questions by the Asian stock investors of investment institutions who were interested in buying the stock. Paying Homage to the Middle East One After Another IR caravans of Japanese enterprises in the Middle East became common this year. While investors in oil nations have an inclination toward long-term investments, they are said not to be concerned with management. Japanese enterprises began sending a love call to the Middle East, which seems to offer “attractive stockholders for their stability,” (said Nihon Densan, which had an IR campaign this March for the first time). Above all, the most popular target is the Abu Dhabi Investment Agency (ADIA), focused on as “a major target for Japanese stock.” Their total investment funds are estimated to be US$250 billion (about 29 trillion yen). The amount is 30% above the California Public Employees' Retirement System (CalPERS), a major pension fund of the U.S. There are also Japanese fund managers, and the investment in Japanese stocks is said to be 30 billion dollars (about 3.5 trillion yen) at its highest point. Thanks to soaring oil prices, foreign investment in the Middle East is accelerating. Saudi Arabia’s investment in foreign securities has tripled in the past two years. Recently, they’re tactically taking possession of a good deal of individual stock. Mubadara Development, a governmental institution of Abu Dhabi, gained 5% of the stocks of an Italian vehicle manufacturer, Ferrari. It was reported that ADIA was considering buying stock in a major bank in China. An Editor Edmond O’Sullivan of MEED, an economic magazine of the Middle East, says, “Japanese enterprises may well become their objects in time.” Those who pay attention to Middle East money aren’t only enterprises. Japanese securities companies are moving to take them in. “Japan’s Return and Emergent Markets of Asia” -- Nomura Securities Company held a workshop with the above title in Kuwait and Beirut in November. Nomura held a seminar on the investment in Japan in the Middle East after an interval of thirty years. About a hundred people, including the wealthy classes, joined the seminar and asked questions like “How high will the Nikkei Average rise?” The Middle East supervisor of Daiwa Securities SMBC, which has a stronghold in Bahrain, visited the Gulf region countries like Saudi Arabia for business in August, when the daytime temperature was 50 degrees. He recommended the funds of venture stock and felt people thought, “Hope for Japanese stock is high, while the unlisted stocks of Western countries aren’t attractive.” Weaker Presence Than Before However, it is the case that the Japanese presence has become weak compared to the 1970s. Because of the sluggish crude oil prices from the 1980s, most securities companies except for Nomura and Daiwa left the region. They adopted the approach of visiting the region a few times a year from other places like London. “Their biggest problem is that they won’t say anything about investments in our region,” Usama Shakir of the resource investment section of the Saudi British Bank complained about Japanese attitudes in that they only recommend Japanese stocks and won’t show any returns to the region. J.P. Morgan of the U.S., the Deutsche Bank of Germany, BNP Paribas of France… After joining the World Trade Organization (WTO), the Saudi Arabian government allowed ten foreign banks to open branches, but no Japanese bank was included among them. Western financial institutions expanded their private banking (BP) businesses and are aiming at international diversified investments by corporate investors. There seems to be a long way to go in rebuilding trust with the investors so that Japan can take oil money in. Investment Boom: Citizens are Passive “A new horizon of investment,” “Diverse choices for you”: When visiting the Gulf region, you’ll be surprised at the advertisements of financial institutions to boost investment that can be seen everywhere, ranging from airports or office buildings or parking lots. An Importance Next to Oil “There are over fifty investment fund companies in Kuwait, whose population is less than a million. For us, the economic activity which is important next to oil is investment,” Mr. Ali al-Suful, an analyst of the Global Investment House (Kuwait) stressed repeatedly. In every Gulf country that I visited for these interviews, I saw a savage desert with bushes on the outskirts of the cities. Manufacturing industries are hard to develop, and there are few opportunities to make profits except for investment. Because an Islamic law called sharia prohibits interest, they tend to choose investments in which they cannot tell the profits beforehand than in deposits based on certain interest. In the Middle East where stock investments are prospering, people make great efforts to gain profits. The local corporate investors’ utmost strength is their experienced, brilliant minds. “I have many acquaintances who were headhunted and quit Western financial institutions like HSBC of Britain,” said Mr. Cornelius Regis, a British manager of a fund investment company targeted by the Westerners who are staying Dubai. Most of the new employers seem to be local major corporate investors which are engaged in international diversified investment. The governmental institutions, including the Investment Ministry of Kuwait, have separate sections by country, such as Asia, including Japan. Europe and U.S. portfolio managers are employed who understand each area’s economics and stock prices. An IR (Investor Relations) supervisor of a Japanese enterprise said, “I was surprised because it was a Briton whom I met when I visited.” The private companies which have their own investment companies are called “family offices” and often employ foreigners, decide the investment allotment in each country at these offices, and leave actual investment to Western investment companies. Many people view the Middle East corporate investors, which take advantage of such brilliant material, as “sophisticated experts of investment who aren’t behind the Western countries” (Dubai branch of Franklin Templeton Investment). On the other hand, general personal investors who don’t belong to the wealthy classes have a “passive” tendency. For the active economy brought about by the investment in infrastructure that has been influenced by soaring oil prices and coordinated financial markets, the stock market of the Gulf region has been rising since middle of 2003. It increasingly began soaring from last year, and the increase rates of stock prices from this year are 2.5 times in Dubai and 2 times in Saudi Arabia, which exceed emergent nations like India as well as major countries including Japan. Three Thousand People in the Market There were crowds who looked at the stock price board, talking with their friends in the Kuwait securities market. According to Rashid al-Fraij, a manager of an economic bulletin, the number of individuals who visit the market is about three thousand a day on average. Though electronic trade has been introduced, “They exchange information and rumors about companies, and use them as data to make decisions.” I met Mr. Fahd al-Matari in the Kuwait securities market, who works for an oil-related company, and asked him how he viewed Japanese stock. He laughed and said, “I’m not interested in it. Why should I invest overseas when the domestic market is soaring?” In the Gulf region, expected PE (Price Earnings) of many listed companies are stated at being over fifty times, and a bubble economy is a concern. However, there is still little tendency that individuals direct their eyes toward foreign markets, including Japan, at the present time. Corporate investors aim at stable profits and pour massive funds outside the region, while individuals are riveted to the domestic boom. Everyone invests, but their attitudes toward investment are widely different. Two Interviews (These are interviews with a major corporate investor of the Middle East and with a Japanese securities company official about how Japanese stock are and will be invested in by oil money.) Mr. Badr al-Saad: Raising the Investment Ratio More Q: How do you view the Japanese stock market? Al-Saad: I expected that the stock prices would rise since Koizumi administration conducted reforms and financial institutions were revived. But I never thought it would rise after this summer like this. The Japanese economy which has been sluggish for more than ten years finally began moving toward recovery in earnest. We approve the progress of the reform and have gradually raised our possession ratio of Japanese stocks since a few months ago. Now it accounts for only 11% of the total, but we’re going to raise it more. Asia, including Japan and China, has gained momentum of growth and will be the most attractive market, together with the Middle East and Europe, for the next several years. Q: You focus on individual enterprises lately? Al-Saad: We have already purchased 7% of the Daimler Chrysler stock of the U.S. and we’re interested in Chinese financial institutions. I set up a special team which is researching investment opportunities in detail. There are no specific plans, but Japanese enterprises can be the target as well. Q: What’s your technique of foreign investment? Al-Saad: Firstly, we decide the investment ratio of each major country based on gross domestic product (GDP). The investment ratio is reviewed once a year and large changes like adding another country are introduced every three or four years. We directly trade personal stocks in our London stronghold, but sometimes leave the investment to the Western financial institutions. We have made deals with several Japanese investment companies, too. Our total fund in overseas is over US$100 billion, but I can’t disclose any more than that. Our average investment profits for the past ten years were 9.2%. We won’t take big risks expecting high investment profits. Oil will eventually be exhausted. We are investing while looking thirty years ahead for the stability of the nation and the future generations. Long-term investment is our premise and risk management is thorough. Mr. Takuya Furuya: Rich Funds and M&A Style Investments Q: How do Gulf region investors react to Japanese stocks? Furuya: They weren’t interested one year ago, but major corporate investors which have surplus funds are gradually increasing their interest. I also hear a government institution increased the number of researchers on Japanese stocks. However, big money usually flows in through Europe indirectly. They as yet seldom directly purchase Japanese stocks. As regards foreign stock investment, China is popular. Chinese stock funds which Nomura Asset Management sold through a Saudi Arabian major financial institution in July amounted to nearly 30 billion yen (about US$250 million). India, which is geographically close, also draws attention, but Japan isn’t prominent. Q: Can’t we expect the expansion of investment in Japanese stock? Furuya: Rather, it is a crucial stage from now on. The local financial institutions and our wealthy customers are investing in the booming local market, but it is likely that they make adjustments due to the overheated atmosphere. If they do so, the investment targets will shift to overseas and they may purchase Japanese stocks. Q: What do you think of the intensive investment in specific enterprises which is now a popular tendency in the Middle East? Furuya: Investments which are similar to M&A (Merger and Acquisition between companies) is a new trend, and very interesting. Japanese enterprises can be the target, too. In the Middle East, people think highly of real estate. When Japan gets out of deflation and they feel assured that the land prices will rise, people might invest in real estate companies. Media is a popular category for Middle Eastern investors. In fact, I heard that very rich people were interested in Japanese media companies. If they become serious, there are plenty of funds to take hold of Japanese enterprises.
COMMENTARY 1) From Hossein Ebneyousef of International Petroleum Enterprises on March 14, 2006. A few notes on your oil-related comments: Regarding what was referred to as "Foreign Minister Taro Aso's sudden enthusiasm for an FTA with the GCC": it seems to me that the move has a lot to do with China's recent decision and activity to do the same. Noteworthy is that the US government has taken a more selective approach on the subject and has established FTAs with a number of GCC member states over the past few years. Today, the abundance of the petrodollars in GCC countries is definitely a plus, but the growing fear of parking the Arab funds outside the region after September 11 and higher oil and natural gas prices should have attracted the Japanese, and many others, to the region a long time ago. The Japanese government's effective abandonment of any serious effort to diversify from the Middle East for its imported oil, although not fully justifiable, is a much more complex issue. It is true that oil is a fungible commodity, but the competition for access is NOT always senseless. I suggest we take a closer look at the region: 1 - Has the region's capacity to produce oil grown during the past 30 years? No. It has gone down. 2 - Has there been substantial FDI in the region? No. 3 - What percentage of the FDI has been made towards oil exploration and production? Nil. 4 - What portion of ExxonMobil's (the world's largest publicly traded oil company) total investment over the past five years was made in the entire Middle East, credited with two-thirds of the world's known proven conventional oil reserves? 4% 5 - Has any Japanese entity (public or private) done better than ExxonMobil? No. Japan's Arabian Oil Company even failed to renew its concession in the Neutral Zone (located offshore between Saudi Arabia and Kuwait) earlier this decade. Therefore, with the growing global demand for oil and the declining production in many parts of the world, it would be reasonable to assume that both "security of supply" and "prices" are going to be growing concerns in the foreseeable future. Add the possibility of more wars, unrest, regime changes, economic sanctions, etc., and see if the current argument attributed to MOFA holds any water. What has prevented this to manifest itself earlier is a combination of: a)
Existence of a huge excess of oil production capacity for many
years,
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