Foto: Jim Mullhaupt, Flickr, Creative Commons. EDM: buenas perspectivas en Europa después del temporal
After a modest start to the year, equity markets – especially in the Eurozone – registered painful losses over the last few weeks. While the Eurostoxx 50 has lost 9.3% since its highest level in June, the Italian FTSE MIB tumbled almost 15% over the same period of time. Once more we got confirmation that while market participants can swallow one or two pieces of negative news – in this case the Ukraine crisis and the conflict in Gaza – they tend to reduce risks once a third one occurs. The recent catalyst was certainly the better than expected news from the US economy, which led investors to believe that the US Federal Reserve could increase its leading interest rate sooner rather than later. This fear coupled with, among other things, the aggressive positioning of market participants and deterioration of issuance quality, had already led to a widening of high yield bond spreads ahead of the equity market correction.
But should we really be afraid of a possible earlier Fed intervention? According to UBS Global AM, some wage indicators have certainly reached their lowest points – especially when it comes to smaller companies – but the general inflationary pressure in terms of CPI and PCE remains under control. Also, rate expectations have barely moved in the US.
Two year yields are lower now than at the start of the quarter, even though this could be, up to a certain point, also due to risk aversion rather than a shift in rate expectations. Taking another measure, US primary dealers continue to take a dovish view of Fed actions. In a Reuters survey conducted after the Non-Farm Payrolls released on 1 August, 12 of 18 respondents forecast that the first hike wouldn’t be before the second half of next year. Out of these, half thought the Fed would opt for a 25-50bp target range. So the sell-off has not been driven by a broad based change in market expectations for the Fed. Finally, history might not repeat itself, but usually equity markets are not really affected by rises in interest rates in general, particularly if announced well in advance by the Fed, which is the case presently.
Actually, has this really been a risk sell-off? Emerging market equity has held up well, as have Emerging Market currencies. Investment grade bonds have continued to experience inflows. Spreads on Italian and Spanish government bonds have widened versus German bunds but haven’t moved a huge degree in absolute terms (Italian 10yr started the quarter at 2.844% and is now 2.829%, as of 11 August). It would be wrong to think of this as a return to the risk on/risk off world of 2008-2013. Generally, those areas that were over-owned have experienced the worst of the correction, says UBS Global AM.
So what will happen next? “We believe that the recent correction is primarily a market readjustment driven by repositioning and the usual lower volumes during summertime. We don’t think that we have seen the equity peak for this cycle, even though we expect higher volatility and lower yearly equity market returns than we have seen in the past few years. In our view, valuations are not over-extended, particularly outside of the US, and relative to other asset classes offers more value. In particular, the recovery in the US economy should sustain global growth and allow for higher sales numbers in the coming quarters which will compensate for either higher wage growth (in the US) or modest economic growth numbers (in Europe)”.
“Do we have any worries? Yes, we are always retesting our investment views! While we still think the valuation case for European over US equities is very supportive, we are re-examining the macro and earning gaps, particularly in light of the Russian sanctions and growth data in the Eurozone. We are also looking at global saving/borrowing imbalances as we think this is a meaningful longer-term risk for the global economy. Finally, we are also concerned that, as the US economy strengthens ahead of the rest of the world, changes to Fed policy could be inappropriate for certain European and Asian economies still dependent on US monetary policy. In this regard we hope that the Fed has learnt its lessons from the correction of spring 2013. All of this leads us to expect a world of higher volatility for risk assets in the foreseeable future”.
What about geo-political risks? While many of the geo-political events of the last few months have led to significant human misery, in terms of macro-economics or earnings the effects have been rather limited. The possible exception to this may be the Russian sanction on EU food imports. While Russia had already been on a path of limiting European food imports for some time (for example, all EU pork was already banned in Russia due to an outbreak of African Swine Fever in the Baltic states), the latest sanctions increase the breadth. “Our initial assessment is that the consequences will mainly affect citizens of Russia’s larger cities, who will be confronted with higher food prices, leading to a 1 to 2 percentage point rise in inflation rates down the line. This could become quite an issue for the Russian Central Bank which was already forced to raise its leading interest rate to slow down capital outflows and the weakening of the ruble. Of course, any ban on flights using Russian air space would clearly have more significant earnings and potential macro implications”.
Are there upside risks? Yes. If the European economy continues to disappoint the ECB might take firmer steps towards unconventional measures and possibly asset purchases but this is unlikely to happen in the next few months and the Comprehensive Assessment remains the ECB’s focus for 2014. “We could increasingly have to deal with a situation comparable to the one we have had in the US over the last few years: every time the economic landscape deteriorates, the ECB will be tempted to come back with new measures which, in turn, will be positive for risky assets. Furthermore, we shouldn’t forget that outside of the weaker Eurozone data, the global recovery has gained further traction with signs of acceleration in the US and stabilization in China”.
“At this stage the company feels that is too late in the correction to sell further equities and we are looking to the following signposts to potentially add an overweight in client portfolios: A reduction in geo-political tension between Russia and the EU (and to a lesser extent the US) o Positive price momentum or at least stabilization, indicating that the positioning rotation has played out o Supportive policy action, especially from the ECB”.
CC-BY-SA-2.0, FlickrFoto: Picharmus, Flickr, Creative Commons. Los inversores salen de los fondos de bolsa estadounidense en julio por tercer mes consecutivo
Morningstar has reported estimated U.S. mutual fund asset flows for July 2014. Investors withdrew money from U.S. equity funds for the third-consecutive month, and the pace of outflows increased to $11.4 billion in July from $8.3 billion in June and $6.9 billion in May.
Overall, flows into long-term mutual funds remained positive in July at $14.4 billion, but this total is noticeably lower than in recent months. Morningstar estimates net flow by computing the change in assets not explained by the performance of the fund.
Taxable-bond funds continued to see strong inflows despite declining interest rates. For the past three months, taxable-bond funds have seen the greatest inflows among all category groups.
Despite the strong month for the taxable-bond category group overall, high-yield bond funds saw outflows of $7.9 billion in July after much milder redemptions of $466 million in June and inflows of more than $1.2 billion in each of the previous months of this year except January. Bank-loan funds also saw sizeable outflows of $1.9 billion.
Even though U.S. equity funds saw outflows, Vanguard Total Stock Market Index, Vanguard Institutional Index, and Vanguard Total International Stock Index recorded July inflows of $2.6 billion, $2.2 billion, and $1.8 billion, respectively. With four of the five top-flowing funds for the month, Vanguard topped all providers in terms of July inflows, while Fidelity suffered the greatest provider-level outflows as a result of large redemptions from two of its flagship active U.S. equity funds.
Passive funds continued to dominate, collecting $14.1 billion in July compared with inflows of $0.3 billion for active funds.
CC-BY-SA-2.0, FlickrAlex Crooke, Head of Global Equity Income, Henderson Global Investors. Global Investors Are Enjoying a Bumper Year for Dividends
Global investors are enjoying a bumper year for dividends, according to the latest Global Dividend Index (HGDI) from Henderson Global Investors. Overall pay-outs grew 11.7% year on year in the second quarter to a new record of $426.8bn, an increase of $44.6bn. That increase is equivalent to a whole year’s worth of Japanese dividends. The underlying picture, which excludes special dividends, rose an equally encouraging 10.2%. The Henderson Global Dividend Index rose to 157.8 from 151.6 at the end of March, meaning that dividends are 57.8% higher over the last 12 months compared to 2009, the base year.
Source: Henderson Global Investors as at 30 June 2014
The second quarter is especially important, accounting for almost two fifths of the annual total, so the strong growth was very encouraging. Developed markets drove the good performance, with Europe and Japan at the forefront, after lagging behind in recent periods.
Europe, where companies typically pay the bulk of dividends in this period, dominates the second quarter, accounting for over two fifths of the global total. European firms paid $153.4bn, up 18.2% on a headline basis, led by France and Switzerland. Germany lagged behind its peers, up just 3.9%. The European total was boosted by strong exchange rates against the US dollar. Even so, the $16.4bn constant currency growth from Europe is the best performance from the region by far over the five year history of the HGDI.
Japan also showed convincing growth, up 18.5% to reach $25.2bn. With the sharp year on year declines in the yen now dissipating, currency effects only made a small deduction from the Japanese total.
The US continued to show broad based strength (13.8%), but emerging markets saw their pay-outs decline 14.6% in US dollar terms. Emerging markets are lagging behind developed markets, though the fall was exacerbated by index changes, and sharply lower exchange rates.
For the first half overall, dividends grew a headline 18.4%, the fastest in a six month period since 2011. Unlike 2011, when half of the growth came from the effects of the weaker dollar, the increases this year have largely come from companies raising dividends themselves with only a small favourable contribution from currency effects.
Global currencies continue to be volatile. However, the Henderson research demonstrates that over the medium term, currency effects are a limited factor. Over the last five years, they have accounted for just 1.4% of the total $4.5 trillion of distributed dividend income. In the latest quarter, the currency effect was just 1.5% as some currencies rose and some fell against the US dollar.
Alex Crooke, Head of Global Equity Income at Henderson Global Investors said, “2014 looks set to deliver the fastest growth in global dividends since 2011, only this time, most of that growth will come from increases in pay-outs from firms themselves, rather than from swings in currencies. In 2011, more than a third of the growth came from a falling US dollar. Developed markets are leading the charge, and we expect that to continue. It’s especially encouraging to see Europe and Japan delivering big increases to their shareholders, after lagging behind the rest of the world recently.
“Our investigation into how currency moves contribute to investor returns highlights the value of taking a global approach. Over time, such investors can broadly afford to ignore currency risk as currencies rise and fall against one another through the economic cycle. Investors who take a decision to invest internationally, but only focus narrowly on one region will find themselves much more exposed. Generating a good income on your investments is more about understanding the companies themselves, wherever they are operating.”
Yoy may access the full report through this link and you may watch a video featuring Alex Crooke’s comments through this link.
Foto cedidaWolfgang Zemanek, Erste AM . Wolfgang Zemanek
Erste Asset Management, with an invested fund volume of approximately 2.8 billion euros (as of 30/06/2014), making it Austria’s leading investment company in the field of SRI (Socially Responsible Investments or Sustainable Investments), is enlarging its in-house SRI research team.
Dominik Benedict (32) joined in July as a Senior Analyst to further develop the rating process and company analysis. Dominik Benedict can draw on many years’ experience in the field of Socially Responsible Investments (SRI) and, as a former employee of MSCI ESG Research in Paris, will not only contribute an international perspective but also bring the mind-set of a recognized rating agency to the team.
In addition, Richard Boulanger (25) and Stefan Rössler (26) will also be reinforcing the SRI research team. Richard Boulanger has already gained experience in the SRI team and focuses, in addition to conventional company analysis, on the areas of engagement and active ownership. The active safeguarding of owners’ interests with regard to sustainable corporate policy is an integral part of Erste Asset Management’s sustainable activities.
Stefan Rössler completes the SRI team as a quantitative analyst and will primarily be involved in the development of Erste Asset Management’s rating system as well as the expansion of the in-house rating database. Producing EAM’s own ratings and intelligent use of information constitute key factors in the investment process.
The overall responsibility for the sustainability team, as in the past, lies with Gerold Permoser, Chief Investment Officer of Erste Asset Management.
Christian Schön, member of the Board of Erste Asset Management explains: “Sustainability is a growing market. So we are very pleased that since we started our SRI activities in 2001, we have been able to build this field into one of the company’s core competencies. Over the years we have established ourselves as the clear market leader in Austria.”
With these three new recruits, the analytical capacity in the field of sustainability has been noticeably reinforced. And the expansion of the team is not over yet: “We will continue to strengthen our core competency of sustainable investment and are convinced that in so doing, we are emphasizing our internationally recognized market position in this field,” said Schön.
Foto: PicturePerfectPose, Flickr, Creative Commons. Los gestores de hedge funds apuestan por la renta variable pero son cautos con el crédito estadounidense
According to the results of a survey conducted at the end of June of hedge fund managers on the Lyxor platform, there is a positive sentiment concerning risk assets. Equities are largely expected to continue to rally, both in the US and Europe, on the back of accommodative monetary conditions recently reiterated by Janet Yellen. However, on the negative side, Lyxor managers express caution regarding US credit and China.
The bullish stance on equities, both in Europe and in the US, was largely shared by the respondents to the survey. The level of agreement that US equities are not overvalued and European equities remain undervalued is very high. The respondents were more divided with regards to equity investment styles. 50% do not expect value continue to outperform growth stocks. Value stocks have underperformed growth stocks for several years, especially in the US. However, the underperformance of value stocks unexpectedly and abruptly reversed in March and April 2014.
According to a recent press report, this is the least- believed bull market in years. Most asset allocators remain bullish on equities because of the lack of opportunities in other asset classes. Equity investors believe that valuations are not overstretched globally. The bullish case generally assumes that earnings will take the lead after the expansion of multiples over recent years. “L/S equity funds continue to attract significant investor interest. However, style gyrations caused some damage earlier in Q2. As a result, investors must be aware of the biases implied by the investment style of a fund. We recommend a balance between growth and value oriented funds in a L/S equity portfolio”, says Lyxor. L/S Credit funds focused on Europe and L/S equity funds focused on Japan should do well if these expectations effectively materialise.
The majority of the respondents to the survey currently expect the central banks to remain extremely accommodative. According to Lyxor managers, the ECB and the BoJ should implement (or expand) quantitative easing programmes in the second half of 2014. At the same time, only 47% of respondents think that the Fed will lift rates in the first half of 2015. As a result, 10-year Treasuries are not expected to reach 3% over the next six months. Finally, the increasingly dovish stance of the ECB suggests that the EUR will fall versus the USD to below 1.35 according to 53% of the managers surveyed.
Other important finding of the survey is that hedge fund managers are increasingly cautious regarding US credit. This is being seen in the context of rising fears concerning financial stability following the extended period of near-zero interest rate policies implemented by the major central banks. According to the survey, 65% of the respondents do not expect the credit rally to continue.
“US fixed income and credit appear increasingly expensive as an asset class. Although long dated Treasury yields are not expected to move significantly higher, a long-only strategy on credit does not fit with current market conditions”, says the report. For this reason, unconstrained bond funds are much more adapted to current market conditions. At the same time, Global Macro funds should do well as a result of established short EURUSD positions.
Emerging markets
Emerging Markets remain a key investment theme given attractive equity valuations and carry positions in fixed income. However, downside risks for EM have increased as the Fed prepares its exit strategy. The EM asset price gyrations in May 2013 (when Bernanke first signalled tapering) were a good reminder of the emerging markets’ sensitivity to US monetary policy.
The vast majority of the respondents of the survey (74%) expect real GDP growth in China to fall below 7% over the next two years. In parallel, over the next six months, the WTI is not expected to fall below USD100/ bbl (USD105/ bbl as of 30 June). However, it is important to note that the survey was conducted at a time when geopolitical tensions were rising and the risk premium attached to oil prices had probably increased significantly.
“Deceleration in growth in China would have a significant impact on emerging markets, particularly Latin America (huge producer of base metals consumed by China) and Asia (supply manufacturing chains). Latin America is more exposed here given that the deceleration would tend to come from an adjustment of the real estate market, a commodity intensive market”, says the report.
In terms of strategies, L/S equity funds with a Chinese focus playing domestic consumption themes should be resilient due to the rebalancing of the economy. At the same time, the Chinese equity market is attractive from a valuation standpoint. Additionally, the deceleration in growth should already be priced in to a certain extent, as this forecast is quite consensual. Finally, CTAs provide a very good hedge against geopolitical factors due to their established long energy positions.
Foto: Covilha, Flickr, Creative Commons. El oro y la volatilidad
GBI (Gold Bullion International), an electronic platform for the purchase, sale and storage of precious metals, is pleased to announce that New York Private Bank & Trust has made an investment in the company. The NYPB&T investment will enable GBI to continue its growth – including the build-out of its cutting-edge, Internet-based software offerings for use by sovereign mints, wealth managers, investment firms, high net worth investors, as well as for digital currencies.
New York Private Bank & Trust is the parent company of Emigrant Bank, HPM Partners and three Internet-based banks, and offers private banking services through its NYPB&T division. NYPB&T and its affiliate companies will join the GBI platform in order to offer its wealth management and banking clients access to physical precious metals through GBI’s platform.
“The GBI family is excited by its partnership with NYPB&T,” said Steven Feldman, GBI’s co-founder and CEO. “The visionary thinking that Howard Milstein and New York Private Bank & Trust are known for will be a very valuable asset to GBI as it further expands its existing platforms and enables its sophisticated precious metals business to be utilized by far more market participants.”
“We believe our relationship with GBI will enable our clients to have a robust opportunity to invest in gold and other precious metals that have been a store of value for thousands of years,” said Howard Milstein, New York Private Bank & Trust Chairman, President and CEO. “Gold is the ultimate store of value. As inflation, geopolitical and sovereign debt risks move to the forefront of investor minds, gold will become an effective hedging component in the portfolios of small and large investors alike.”
Mr. Milstein added: “GBI provides the most cost effective and advanced trading platform for investors to purchase and store precious metals, given its ability to offer consumers transparent and razor-sharp pricing through unprecedented access to the largest network of dealers.”
Deutsche Asset & Wealth Management (DeAWM) has announced that Carolyn Patton will join as a Managing Director and Head of Consultant Relations, Americas.
Based in New York, Carolyn will report to Mark Bolton, Global Head of Consultant Relations. Regionally, she will report to J.J. Wilczewski, the newly appointed Co-Head of the Global Client Group, Americas, who is responsible for serving institutional investors.
In this newly-created position, Patton will be responsible for cultivating relationships with investment consultants based in the Americas. She will play a key role in helping the region’s leading consultancies access the firm’s global investment capabilities on behalf of their clients.
“I am delighted to welcome Carolyn to the firm, as we are committed to broadening our reach and strengthening our position in the institutional marketplace,” said Mark Bolton. “Carolyn’s connections and depth of experience will be a significant factor in helping consultants and their clients appreciate the full scope of our investment capabilities.”
Patton is the latest high-profile strategic senior hire by DeAWM as it pushes to enhance outreach to institutional investors, expand its institutional product offerings, and continue to build its overall market share in the Americas. In July, the firm announced that J.J. Wilczewski was hired to lead the institutional investor effort, overseeing client coverage and distribution in the Americas region. Over the last six months, DeAWM has added more than a dozen leading asset and wealth management executives to its Americas team while investing in new technology and launching innovative fund offerings.
“Investment consultants are a critical element of our institutional growth initiative in the Americas,” said Jerry Miller, Head of DeAWM in the Americas. “With a full suite of solutions across multiple asset categories and investment disciplines, we believe we have a compelling and differentiated offering for institutional clients in the region.”
Patton brings over twenty years of experience to the DeAWM. Most recently, she was an Executive Managing Director and Principal at Turner Investments, an employee-owned investment manager based in Pennsylvania. From 2005 to 2011 she worked for Janus Capital Group, where she was Global Head of Consultant Relations. Before that, she worked at Morgan Stanley Investment Management both in the Americas and Europe.
Despite geopolitical turmoil and global economic uncertainties, both the global and U.S. economy appear to be at an inflection point in mid-2014 to a somewhat stronger growth rate despite risks, according to BNY Mellon Chief Economist Richard Hoey in his most recent Economic Update.
“After an initial global growth surge early in the expansion reflecting an easing financial crisis and aggressive Chinese stimulus, global growth has been running at a sustained but sluggish pace for several years,” said Hoey. “This has extended through the first half of 2014 since two major countries (the U.S. and Japan) were roughly flat in the first half of 2014 while the initial phase of the fragile European recovery from its double-dip recession was quite tentative.”
“There has been a clear improvement in the U.S. labor market in recent months,” Hoey continued. “We expect mid-2015 to represent the transition from five years of U.S. economic growth slightly above 2% to three years of three percent growth in a ‘three-for-three’ pattern. The expected acceleration does not reflect major new sources of strength but rather the fading of several drags, including the fiscal tightening and private sector deleveraging. Thus we continue to expect an ‘eight-year economic expansion’ (2009 to 2017) in the U.S.”
“Geopolitical turmoil has been occurring in a number of locations and appears to have worsened recently. We are hopeful that a major disruption in the flow of oil from Iraq can be avoided, given the location of the Iraqi oil fields. We do expect that there will be continued worry about the flow of natural gas from Russia to Europe this winter. Those worries could hold back confidence in Europe over the next several months even if a major disruption of natural gas supplies to major European countries this winter can be avoided, which is our expectation,” Hoey concluded.
Other report highlights include:
China Sustained Expansion Expected – Contrary to a talked about “Chinese financial meltdown scenario,” Hoey expects a sustained expansion and a gradual downshift in Chinese trend growth over the coming years.
Japanese Expansion Resuming – Japanese real GDP growth should be reported to be roughly flat in the first half of 2014 in a very volatile pattern, according to Hoey.
European Recovery Sluggish but Sustained – While the Ukraine conflict and associated sanctions should weaken Russian demand for imports from Europe and raise uncertainties about the outlook for the European economy, the most likely case for Europe is sustained economic recovery at a sluggish pace over the next several years according to Hoey.
Not all holders of Argentinean government bonds are affected by the partial default of the country. “Argentina is not facing national bankruptcy, but is only subject to a moratorium, which affects only a part of the Argentinean government bonds”, as Felix Dornaus, Senior Fund Manager for Global EM Hard Currency with Erste Asset Management explains. Only those bonds are affected that have been issued within the framework of the restructuring programme since 2001 and under US jurisdiction. It s still up to legal clarification whether bonds issued under British law are also affected. “All other bonds, both government and corporate bonds, should basically remain serviceable without restrictions”, he points out.
The rating agency S&P had declared a partial default (“technical default”) for the South American country in the previous week. Prior to that a 30-day period had lapsed within which coupon payments on certain restructured government bonds should have been made. While Argentina had deposited the amount required by the due date, the actual payment by Bank of New York, which acts as paying agent for Argentina, was prevented by the arbitral verdict of a New York district judge. According to the verdict, the claims by those creditors that had not participated in the restructuring since 2001 would have also had to be honoured. These so-called holdouts accounted for about seven percent of all creditors at the time.
The negotiations between the Argentinean government and the holdouts are ongoing. It is now crucial to clarify complex legal circumstances and interests. According to Dornaus, the results of these negotiations defy prediction. In the worst-case scenario, the terms of the contract would allow even those creditors to sue for a full servicing of debt that have already given their consent to the restructuring. This group makes up 93% of all creditors of the government bonds that were up for restructuring at the time. “If this were to happen, which from the current perspective is unlikely, and should this lawsuit be successful, Argentina would probably be facing a shortage in foreign currency”, says Dornaus. An agreement is not foreseeable at this point. “We expect months worth of negotiations rather than weeks.”
No risk of contagion for other emerging markets bonds
Until a solution has been found, the fund manager expects elevated levels of volatility, and that includes Argentinean corporate bonds. At the same time, Dornaus does not envisage any risk of contagion for emerging market bonds overall. “Argentina is an isolated case, which is why the development should not come with any significant form of impact on the bonds of other countries.” That being said, the history of conflict between Argentina and the suing hedge funds should be taken into consideration in any future restructuring. In the future the question will not only be how to deal with investors that do not wish to take part in restructuring programmes. Debtors would also have to consider whether they wanted their issue to be based on US jurisdiction again, which would enable district courts to interfere with the sovereign rights of states.
“Even for professional investors in emerging bond markets it is hard to project the future development, given that in the past 35 years there has been no comparable case to this one”, as Felix Dornaus explains. But in any case, Erste Asset Management is only marginally affected by this situation. EAM is basically underweighted in Argentinean government bonds. At EUR 1.6mn vis-à-vis total assets under management of EUR 50.5bn, its exposure in the Argentinean government bonds that are affected by the New York verdict is very limited indeed.
CC-BY-SA-2.0, FlickrFoto: Bullion Vault. La relación entre el oro, la inflación y el precio del petróleo
As we enter the second half of the year, Bradley George and Scott Winship, Portfolio Managers of the Investec Global Gold Funds, provide their review of 2014 and key drivers of gold market sentiment going forward, in particular the linkage with the higher oil price and higher inflation.
Gold in the year to date
The first half of 2014 saw the gold price up 10%, as weak US economic data raised concerns about the economic recovery and hence implications for the longevity of the Federal Reserve’s quantitative easing (QE), which is currently being tapered.
More recently there has been renewed investor interest in gold. Investec’s Gold Team thinks the following three factors are influencing investors’ appetite for gold.
Is inflation potentially entering the system?
Inflation has long been suggested as a potential consequence of unprecedented money creation by the world’s central banks over the last few years. There are signs that it may slowly be emerging in 2014. Year-to- date US consumer prices have risen at a 2.6% annualized rate. Some of this can be attributed to fuel and food, but examining core inflation shows an acceleration to 2.3% for the first five months of the year versus 1.6% at the end of 2013.
Gold has historically proven to be an excellent hedge against inflation. Goldman Sachs recently produced research which suggests that there is a 91% correlation between US CPI and the USD gold price over the past decade1. The correlation remains strong at 73% when the time period is extended and run from 1970 to today.
Increased geo-political risk
The second factor affecting the gold price is linked to the first. Geo-political tension surrounding the Russia and Ukraine situation tested investors’ risk appetite in the first half of the year and continues to do so. The market has also focused on escalating violence in the Middle East, with particular attention on Iraq. The Investec Asset Management Energy team published the following thoughts on the situation:
“Iraq today produces 3.3m barrels/day, making it the second-largest producer in OPEC, after Saudi Arabia. Over 2.5m barrels/day of this (75%) come from the giant structures in the Southern Mesopotamian Basin, approximately 150km southeast of Baghdad .In our view, these oil fields are not under threat from ISIS at this stage, nor is the key export facility at Basra. If Baghdad falls to the insurgents, which we feel looks unlikely, then these oil installations become vulnerable.
We are forecasting $115 Brent for the second half of 2014. If exports from Southern Iraq are threatened, we believe the move up in international oil prices will be at least $5-$10 from here. If they are physically disrupted for any length of time we expect to see Brent above $130. At such levels we would expect demand rationing.”
The relationship between the gold and oil price exists as oil is a significant input of the world’s activity and hence inflation baskets. If Investec’s Energy team’s view of a stronger for longer oil price is correct it would keep inflation statistics elevated. Over the long term, the gold price has traded at approximately 16x the oil price. Today that relationship is just shy of 12x and arguably represents value for gold if oil remains at these levels.
The final point is that of seasonality, which has historically led to higher gold demand in the second half of the calendar year and hence better price performance. This is because the Indian monsoon/harvest season boosts incomes and the timing of the Indian wedding season, around Diwali, sees significant quantities of gold purchased as gifts.
Investec believes that the factors discussed above will generate further interest in gold and gold ETF inflows driving the gold price higher.
