The vulnerabilities of Saudi Arabia’s oil infrastructure may add some risk premium to oil prices. Gold demand remains strong suggesting further upside potential. No changes to our preferences concerning hedge funds.
Oil The oil market was thrown into turmoil on September 14 when Saudi Arabia’s largest oil facility was attacked, removing some 6% of global oil supply. After an initial 20% surge, Brent prices settled down as it became apparent that the outage would not last too long. However, the attacks will serve as a wake-up call regarding the vulnerability of key parts of global energy supply, meaning that prices are likely to reflect a higher geopolitical risk premium going forward.
This being said, strong US output gains continue to dominate OPEC and Russian production cuts, keeping the world market in modest oversupply. Moreover, the slowdown in global manufacturing and GDP growth suggest more sluggish demand gains ahead.
All in all, we expect oil prices to trade only modestly higher over the next 12 months.
Gold demand continues strong. According to the World Gold Council, ETF demand has risen by 292 tonnes (t) year-to-date, taking ETF gold holdings to 2’791t, just 2% below their 2012 all-time highs. In addition, central banks – particularly in the emerging world – continue to add bullion to their reserves : in H1, their 374t purchases were the largest in almost 20 years.
Assets, like gold, which offer no dividend or coupon tend to be shunned when interest rates and bond yields are high. When both are negative, as is so often the case today, the opportunity cost of holding gold dwindles, making it look more attractive in comparison. Add to the mix gold’s portfolio construction properties – it tends to perform well in times of market stress – and it becomes apparent why it remains one of our preferred diversification instruments.
Managers specialising in Special Situations tend to build up exposure to markets trends, making such strategies vulnerable when markets correct sharply like in early August. We continue to prefer Merger Arbitrage – deal volumes are picking up (cf. the mooted remerger of Altria and Philip Morris), and spreads in price between predator and prey still look attractive.
We prefer low volatility strategies which hold their own in bear markets, such as Merger Arbitrage.
Strong demand and safe-haven qualities continue to underpin gold prices. We are Overweight.
The vulnerabilities of Saudi Arabia’s oil infrastructure may add some risk premium to oil prices. However, demand is clearly lower given a widespread slowdown in growth. We expect oil prices will trade only modestly higher over the next 12 months.
Source: Kleinwort Hambros 04/10/2019 *Duration: short = Up to 5 years, medium = 5-7 years, long = 7+ years
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.