Market views: where to invest in a context of record oil prices? | Fund managers

Oil prices have soared in recent months, driven by a growing imbalance between supply and demand as well as heightened geopolitical risks.

The price of a barrel of Brent had increased by 50% in 2021, and by an additional 20% since the start of this year. On Wednesday, Dated Brent hit $100.8 a barrel for the first time since 2014.

The increases in energy prices over the past 12 months as well as the currently high rates have raised concerns among investors. Although the economy is expected to slow, inflation will continue to drive up costs.

Russian-Ukrainian tensions have also added to concerns. Russia is the world’s leading exporter of natural gas (17.1% of world production) and the second largest exporter of crude oil (12.1%) after Saudi Arabia (12.5%).

Although Russia is signaling that some of its troops have withdrawn from the border, broadcasting a looming crisis, the market still expects volatility as neither side is likely to back down on key targets. .

This week, Asian investor immersed in asset managers’ asset allocation strategies amid rising oil prices and inflationary pressures.

The following answers have been edited for brevity and clarity.

Subash Pillai, Regional Head of Client Investment Solutions APAC
Franklin Templeton

Subash Pillai

Fund managers are significantly overweight asset classes that perform better when oil prices rise, such as commodities, and underweight those that are vulnerable to rising oil prices, such as bonds. Within equities, allocations to energy stocks are close to all-time highs. This suggests that the balance of risk is that overcrowded positions will unwind if oil prices weaken. This could be due to a reduction in geopolitical tensions, a nascent supply response or weaker demand.

We have already seen signs that energy inflation is eroding consumer purchasing power, confidence and spending, especially for commodity-intensive and supply-constrained goods. Tightening by central banks could exacerbate this slowdown and increase the uncertainty that has recently supported commodity prices.

Our asset allocation strategy is built around our expectation of greater volatility throughout 2022 and we advocate being agile in cross-asset allocation. Within asset classes, we have positions that hedge against further increases in energy prices. We are currently overweight equities and underweight duration. Within fixed income, we prefer credit sectors that have shorter duration, such as high yield versus investment grade. We also reduced our exposure to European equities, as they are the most exposed to the Russian and Ukrainian conflict and rising energy prices.

Tai Hui, Chief Asian Market Strategist

JP Morgan Asset Management

Tai Hui

While growth in U.S. oil production and the potential breakthrough in the Iran nuclear deal could bring some relief to the oil market, underlying supply and demand dynamics should further support oil prices. at least for the first half of 2022. A further escalation of tension in Europe will lead to a sharp rise in energy and commodity prices in the broad sense.

Higher energy costs would benefit the energy and materials sectors in the short term. This is especially important as the broader equity market reassesses the monetary policy outlook of the US Federal Reserve and other developed market central banks.

Rising interest rates could create further divergence in performance in the value and growth sectors. Higher energy costs could also act as a catalyst for governments to invest more in renewable energy and reduce their dependence on fossil fuels.

For fixed income, the energy sector in the corporate high yield market has already outperformed in 2021, but high energy prices could provide more spread compression headroom, which would help performance total potential.

David Chao, Global Market Strategist, APAC ex-Japan

david chao

Geopolitics will be the main driver of energy prices in 2022, although I expect prices to remain elevated due to continued strong demand from economies opening up and tight supplies due to underinvestment in commodities during the last years.

High energy prices could lead to sustained inflationary pressures in places like the United States, which could force the Fed to tighten monetary policy more quickly – leading to higher bond yields, a stronger US dollar, fluctuations in the stock market and a stronger pivot from growth to value.

Rising energy prices could also reduce consumer appetite and spending in places like the US and Europe, which could lead to underperformance in consumer services and discretionary sectors. Most Asian emerging market countries are net importers of energy and so far many Asian central banks have maintained loose monetary policies and policy rates. If energy prices remain high, it is possible that this will translate into stronger inflationary pressures for the region and could also force Asian central banks to preemptively tighten, which would have a negative impact on the rebound. many emerging Asian economies, on currencies and local currency bonds.

Although China is a net importer of energy, the country has already put in place policies aimed at reducing the prices of certain commodities and increasing oil reserves. The government also has the means to deploy fuel subsidies for consumers. Still, China continues to see high producer prices due to high commodity and energy prices, and it is worth watching if this trend will continue for some time.

Sean Taylor, APAC CIO

Sean Taylor

We believe energy prices have already seen the bulk of the price increases. Will we see a continuation of this price momentum? We do not think so. On the one hand, the current price certainly includes a risk premium linked to the Russian-Ukrainian dispute of around 5 dollars a barrel. While we don’t think this crisis is getting significantly worse, it could drag on a little longer and spook the markets for quite some time – weeks or even months.

Indeed, over a 12-month horizon, we anticipate a significant decline in the price of oil around $70 a barrel. This is arguably more aggressive than market expectations, as the Brent March 2023 futures contract is currently trading above $80 a barrel on Wednesday. However, this still calls for a price drop. It should be remembered that the Organization of the Petroleum Exporting Countries (OPEC) generally tries to avoid too large price spikes, as this can lead to reductions in demand and increased efforts by consumers to replace oil with alternative energy sources.

So, as we believe energy prices will stabilize and eventually decline over the course of the year, we see no need to adjust portfolios at this time. The sector, however, had been a market favorite in recent months to play the reopening trade and rising inflation and interest rates. However, for sustainability reasons, we preferred to overweight the financial sector and not the oil sector for the same reasons.

Mabrouk Chetouane, Head of Global Market Strategy, Solutions, International
Natixis Investment Managers

Mabrouk Chetouane

Even if we see a sort of “de-escalation” on the Russian-Ukrainian front, prices should remain supported for some time.

The tightening of financial conditions combined with higher inflation is having a negative impact on household and corporate income. So while policymakers ultimately remain data dependent, the risk of a flattening yield curve is on the upside.

In this environment, risky assets may suffer and bonds may not offer their usual protection to portfolios. In order to protect the portfolios from this adverse scenario, particularly in the short term, we are increasing exposure to break-even inflation, underweight sovereign bonds and equities, while maintaining a value bias in the portfolios.

Sebastien Page

Sébastien Page, Head of Global Multi-Asset and Chief Investment Officer
T price. Rowe

Although it is too early to speak of a recession, the possibility of an economic slowdown beyond what was expected seems to be increasing.

In our multi-asset portfolios, we favor cyclically oriented equity markets such as global ex-US equities, value stocks and small cap companies. We also favor emerging market equities, which are benefiting from a recovery in demand and improved vaccine distribution.

Floating rate loans are attractive in a rising rate environment given their yield advantage and shorter duration profile. China is loosening as the developed world tightens. This could make China – and emerging markets more broadly – ​​an interesting contrarian trade for 2022.

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