This feature is part of our FREE daily Money Morning email. If you’d like to sign up, please click here: sign up for Money Morning
Hugo Chavez, the man who no doubt hopes his face will one day decorate the walls of a thousand student residences, is merrily turning Venezuela into his own personal little economic chemistry lab.
Unfortunately for Venezuelans, he’s simply repeating all the old experiments that never worked in the past and certainly aren’t going to work now. But Chavez will no doubt have fun wearing his natty little military outfits and robbing his countryfolk blind in the name of populist anti-Americanism – it’s just tough on the ordinary people who’ll have to pay for it all in the end.
Anyway, Chavez’s latest wheeze is to decide that his country ‘gave away’ the national telecoms company, CA Nacional Telefonos de Venezuela (or Cantv for short), when it was privatized in the early 1990s. So now he plans to take it back – only he doesn’t want to pay the market price…
To say that Cantv is an important company in Venezuela is a slight underestimate. The group accounts for nearly 20% of the value of the Caracas Stock Exchange Index, so it seems unlikely that Venezuela will be coming first in any ‘best-performing market of 2007’ contests at the end of this year.
Chavez’s threatened plans to renationalise a number of listed companies (Cantv, 10 power companies and four oil joint ventures so far) have already seen the index fall 16% this year. Meanwhile, his suggestions that the central bank’s independence be stripped from it have pushed the currency to a near-record low against the dollar in “unregulated trading” (Venezuela has been subject to currency controls since February 2003 – another gift from Chavez).
Cantv is also listed in the US, where the price of its ADRs (American depositary receipts) has also plunged. US telecoms giant Verizon owns 28.5% of the group which it had been planning to sell to a joint venture between America Movil and Telefonos de Mexico for $677m. That deal looks pretty unlikely to go ahead now, and Verizon is unlikely to get the money – though in the context of the group’s size, $677m is very small change indeed.
But while it might be small change to Verizon, anyone else who’d bought into Cantv (including all those ordinary Venezuelans who between them own 6% of the company) have seen the value of their stock plunge in recent days – something which may not be quite as inconsequential for them.
Earlier this month, hopes were high that investors would get their money back, after one Venezuelan politician said investors would be compensated. Now it seems that won’t be the case – though anyone who got their hopes up based on the word of a politician in what is pretty much a communist dictatorship is probably a bit too naive to be putting money into developing market economies.
So why the renationalisation? “Some people are saying we have to pay the international price for Cantv. No,” said Chavez. “The state gave that company away. We’re going to take it over first, and pay later.”
It’s not just Venezuela that’s used this argument about the state giving things away too cheaply recently. Many commentators point to Russia’s current confiscation of various assets – particularly foreign-owned oil fields – as being a direct result of it being forced to sell them off at bargain prices when the country was on its knees in the 1990s (and also, lest we forget, at a point when the oil price was widely expected to never rise above $20 a barrel ever again).
Our response to this would be – well, maybe the state should think twice before it “gives things away” in the first place. Maybe if the states in question didn’t have a tendency to run their countries into the ground, thus reaching the point where they are forced to sell off the family silver at bargain prices, then they wouldn’t end up feeling so aggrieved when other, less stupid people, make a big success of exploiting these assets at a later date.
Of course, it’s also a valuable lesson for investors in emerging markets, and in fact, anyone with financial dealings in countries with more haphazard legal and political institutions – such as all those investors buying property in Eastern Europe, for example, or blithely pumping their life’s savings into stocks in China and Russia.
Regardless of how stupid and self-defeating these populist political moves are, it doesn’t prevent them from happening. And when unstable governments and leaders see assets that once were cheap – like property, or commodities, or formerly nationalised companies, for example – soaring in value, they want a piece of the action, like any good gangster.
In developed countries, politicians get their slice by taxing you – in less sophisticated jurisdictions, and particularly if you’re a foreigner, the state might just decide that your assets no longer belong to you.
Turning to the stock markets…
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: Money Morning
In London, the FTSE 100 closed at 6,218 yesterday, having fallen 18 points as early weakness on Wall Street hit investor sentiment. FT owner Pearson was the biggest faller of the day, despite a positive trading update, as investors were disappointed by a lack of bid comment. For a full market report, see: London market close
Weak trading on Wall Street also hit stocks on the Continent. The Paris CAC-40 closed 34 points lower, at 5,579. In Frankfurt, the DAX-30 ended the day 59 points lower, at 6,687.
Across the Atlantic, stocks tumbled as the tech sector was hit by last week’s disappointing earnings. The Nasdaq fell a further 20 points to close at 2,431. Aerospace stock Boeing weighed heavily on the Dow Jones which ended the day 88 points lower, at 12,477. The broader S&P 500 index also lost 7 points to close at 1,422.
In Asia, the Nikkei closed lower, falling 16 points to end the day at 17,409, as investors took profits from Monday’s gains.
Crude oil was 29c higher at $52.87 this morning, whilst Brent spot last traded at $53.04 in London.
Spot gold climbed to a high of $635 overnight on the back of the stronger oil price, and was trading at $654.60 this morning. Silver, meanwhile, had slipped down to $12.92.
And in London this morning, stationer WH Smith announced a 6% fall in like-for-like sales in the 20-week period up to January 20. However, in a statement the company cited an increase in profitability. WH Smith shares had climbed by as much as 21p in London today.
And our two recommended articles for today…
Has the finance industry forgotten the meaning of risk?
– The market for St Tropez villas is boooming as City traders rake in their bonuses. But is their stellar performance based on a bubble in the bond market? asks Adrian Ash. To find out whether the good times can last – and what an ‘irrational bubble’ is – read: Has the finance industry forgotten the meaning of risk?
Quit while you’re ahead
– What do Chancellor Gordon Brown, BP’s Lord Browne and fund manager Anthony Bolton have in common? asks Merryn Somerset Webb. They should all have got out before their respective stars began to wane. For more on why Brown’s reputation as the Iron Chancellor is under threat – and why he should take a lesson from Browne – see: Quit while you’re ahead