Shock therapy: oil price spike talk spooks investors

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Investors are bracing themselves for a potential oil price spike which could follow the escalation of tensions in the Middle East, but how are fund managers and invetsment professionals reacting to these risks?

In recent weeks some managers have warned of the potential astronomical rises in oil price, while others have taken the opportunity to invest in oil producers outside of the Gulf Coast region.

‘In our experience, politics has always been very difficult to predict and, for that reason, we haven’t constructed the portfolio around this type of shock, but we are acutely aware of it as a risk,’ said Euro Stars A-rated manager Jonathan Day, manager of the Morgan Stanley European Equity Alpha fund.

Day is concerned about the destabilising effect of an oil shock on the already vulnerable global economic picture.

‘We suspect that a prolonged period of higher oil prices – as we have had a $20 upward move recently – is likely to have a degree of negative impact on the US and European economy. The impact normally occurs with a lag of around six months.’

Day added there would be similar impact on inflation data, as raw material prices and wages would rise to take into account higher energy prices. He said oil price dynamics would remain a topic of conversation with investors over the coming months.

Sharat Dua, manager of the Magna MENA fund, said: ‘I think all stock markets would likely take a leg down in the event of an Israeli attack on Iran, not just the Middle East markets, as investors raise their equity risk premia.’ 

‘Hopefully after the initial shock there would be some recovery, and certain stocks would do better than others – which is when stock-pickers can add value.’

Dua added that on the other side of the coin, a sustainably high oil price of $100-120 per barrel in the absence of military conflict would be an overwhelming positive for the Gulf markets.

Eurozone shock

Echoing Day’s concerns, Giles Keating, head of research for private banking and asset management at Credit Suisse, said an oil spike has dislodged the sovereign debt crisis at the top of his list of concerns.

Speaking at the Credit Suisse Asian Investment Conference, Keating said: ‘On geopolitical problems in the Middle East, which would lead to a much higher oil price, we think that is now a bigger risk to our global outlook than the eurozone.’

Keating said an oil shock would be bad news for equities, debt markets and commodities as well. In addition, he said any strains put on liquidity could also put pressure on the markets’ favoured safe haven – gold.

Peak oil

However, this is not just a short-term problem, according to DWS Investments’ think tank, the DWS Investments Global Institute.

In a research paper published this week, the company focused on the theme of ‘peak oil’. If global production volumes really have peaked, major exporting nations could become net importers.

‘There is a real danger that oil scarcity will lead to further recessions and may spark resource wars,’ DWS said. ‘Available data suggests that once peak oil has been reached, the global economy will face a prolonged oil crisis.’

On the plus side, DWS said investors could capitalise on developments in clean technology, which they expect to become more attractive as an alternative, especially in the wake of the Fukushima nuclear crisis.

‘Investors can benefit from the long-term trend reflecting a need to revamp the global energy system towards more efficiency, self-sufficiency, renewable energy, and clean technology,’ it said.