Oil’s Fall: Net Effect on Global Demand Should be Positive
The oil price will likely recover in the second half of the year as supply growth starts to slow and demand picks up, according to a leading investment analyst.
“Over the next 12 months we expect Brent to rebound to just over $70 a barrel. But we might see further weakness first,” Simon Smiles, chief investment officer–UHNW (ultra high net worth), UBS Wealth Management, told Arab News in an interview.
Asked whether he would recommend investors to avoid a direct exposure to oil, Smiles said: “We recommend avoiding direct exposure to oil, along with other asset classes that do not compensate investors adequately for risk. Our research shows that over the long term, commodities and foreign exchange generally add to portfolio volatility without contributing commensurately to returns.”
Investors should brace themselves for a turbulent year. But UHNW clients should avoid the temptation to retreat into cash or high-grade government bonds that are offering extremely meager returns. There are better ways of protecting themselves, he added.
In the position that he holds, Smiles and his team formulate investment strategy, themes and trades for UBS’ UHNW clients. Smiles, an experienced speaker and moderator of high-profile panels at various international conferences, also contributes to the wider UBS WM House View and sits on UBS’ global investment committee.
He is in constant dialogue with external fund managers and thought leaders in the investment industry to corroborate the CIO House View. He received a PhD in economics from the Australian National University and first class honors in both economics and finance from University of Sydney.
UBS Saudi Arabia is authorized and regulated by the Capital Market Authority to conduct securities business under license.
These are highlights
of the interview:
Q: How will the world economy benefit from falling oil prices?
A: A $10 fall in the price of a barrel of oil saves oil consuming nations about $520 million a day or $190 billion if sustained over a year. Obviously that is to the detriment of oil producers. But the net effect on global demand should be positive, since consumers in oil importing nations tend to spend more.
Q: What impact do you see of falling prices on oil producers?
A: The extent of the discomfort will vary from country to country depending on how well they prepare for a rainy day. High levels of spending in Venezuela, for example, means they have become reliant on oil price of around $120 a barrel to balance their budget. By contrast, Norway only needs about $40 a barrel.
Q: What is your expectation for oil prices in 2015?
A: We expect the oil price to recover in the second half of the year as supply growth starts to slow and demand picks up. Over the next 12 months we expect Brent to rebound to just over $70 a barrel. But we might see further weakness first. Despite a reduction in the US rig count, production is still rising. In addition, the top OPEC nations have made it clear they do not intend to come to the rescue any time soon.
Q: Do you recommend investors to avoid direct exposure to oil?
A: We recommend avoiding direct exposure to oil, along with other asset classes that do not compensate investors adequately for risk. Our research shows that over the long term, commodities and foreign exchange generally add to portfolio volatility without contributing commensurately to returns.
Q: What advice you will give to UHNW clients for this year?
A: Investors should brace themselves for a turbulent year. But UHNW clients should avoid the temptation to retreat into cash or high grade government bonds that are offering extremely meager returns. There are better ways of protecting themselves, such as global and asset class diversification, while still earning a return. Violent swings in individual markets make it more important than ever than investors are diversified.
Q: Do you think the falling oil prices will change dynamics of air travel market?
A: That will depend on how long the oil price slump lasts. Fuel bills account for about a third of the average airline’s cost. But unfortunately for travelers, most large airlines locked in prices at far higher levels for much of the oil they expect to use in 2015. By the time these hedges run off, it’s likely that Brent will have recovered to around $70 a barrel.
Q: What is your projection for global investment this year?
A: The outlook for US equities remains positive as earnings continue to grow. We are also upbeat about the prospects for stocks in the euro zone, which will be supported by a combination of a weak euro, the European Central Bank’s QE program, and low oil prices. We are underweight emerging markets, which face headwinds from a stronger US dollar, weak commodity prices, and the slowing of the Chinese economy.
Q: How can GCC countries utilize their sovereign wealth funds?
A: Sovereign wealth funds are in an excellent position to exploit the premium paid by less liquid vehicles — such as hedge funds, private equity or real estate — as part of a balanced portfolio. Such investments become more appealing at times of ultra-low government bond yields and high market volatility.