Trade war worries have pushed oil prices lower in recent months, but steadier growth ahead should see them stabilise. Strong demand and safe-haven qualities continue to underpin gold prices. In hedge funds, we continue to highlight more defensive strategies such as Merger Arbitrage.
Oil Brent prices have continued to slide after reaching a 2019 high at almost $75 per barrel (b). This comes despite OPEC production cuts, tightening US sanctions on Iran, the collapse of output in Venezuela and disruptions in North Africa, which have all contributed to reduce oil supply to the global market.
However, these factors have been overwhelmed by the continued rise in US output. The Energy Information Administration expects the US to reach 12.3 million barrels of oil per day (mb/d) this year (up from 8.8mb/d in 2016) and 13.3mb/d next year. Moreover, recession worries sparked by the revival in trade war tensions have pushed Brent some 7% lower so far this month.
While global growth is slowing, there are supportive factors and no recession in sight. With Saudi Arabia considering further output cuts, we expect Brent Prices to return to $65/b over time.
Gold According to the World Gold Council, gold demand rose 8% YoY in Q2, reaching a three-year high. The main contributors were central banks, India and ETFs – gold reserves were boosted by 374 tonnes (t), the largest H1 purchases by central banks in 19 years; strong demand in India’s jewellery market pushed demand up to 169t; while 67t of purchases by ETFs took their aggregate holdings to a six-year high at 2’548t.
Investing in gold is often decried because it is an asset which offers no yield. However, the total stock of negative-yielding bonds has reached $17bn, twice the end-December level, making gold look more attractive in comparison. Moreover, gold provides a very useful source of diversification in portfolios in times of stress, as shown in August.
Event Driven 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.
Trade war worries have pushed oil prices lower in recent months, but steadier growth ahead should see them stabilise.
Source: Kleinwort Hambros 04/09/2019 *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.