The US economy, in its permanent quest to achieve energy independence, has driven itself into yet another unsustainable state. Counterintuitively, allocating to commodity and oil exporting emerging market equities and debt might just prove to be the winning strategy going forward.
So much of the present investment policy status quo depends on the commodity prices that the implicit assumptions about the current doldrums in the commodity markets continuing for longer period affects long-term asset allocation. Among other things, this assumption has an impact on equity allocation to the emerging markets, high-yield credit allocation in the US, alternatives, infrastructure – you name it, it all depends on what one believes about the commodities, and particularly the oil price.
In our 2011 Global Systemic Risks review we wrote: “…despite higher production (non-OPEC countries) spare capacity in OPEC countries and falling consumption by non-OECD countries the oil price continues to go up. We explain this by the significant impact of the long positions in oil by financial institutions. A further slowdown in the global economy and oil demand will shift the long interest into short interest and cause large price swings. This will dampen the appetite of institutional investors and cause a period of very low oil prices ($20-40 per barrel).”.At the time of course the $ 20-40 range was career-threateningly far from the current price and the anchoring level. That range was eventually breached, partly due to the reasons we expected, and partly due to things that at the time were hard to predict. The drastic change in the oil price level shifted a number of dependencies in the global economy. In this issue of the Risk Wire we assess the supply chain impact of the current low oil prices on the US economy and propose reasons for the unsustainable low-price regime.
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