What moves if oil moves? Be aware of indirect oil exposure and make use of it

Transcription

1 What moves if oil moves? Be aware of indirect oil exposure and make use of it DR BERND MEYER CFA HEAD OF CROSS ASSET STRATEGY commerzbank.com Large changes in the oil price and elevated oil volatility severely affect the performance of currencies, asset classes, regions and sectors. Investors need to be aware of this indirect oil exposure to steer their overall oil exposure. Indirect oil exposure is the only way for investors not in a position to buy commodities or commodity futures to gain oil exposure. Moreover, indirect exposure may be more attractive than outright investments in futures markets when oil futures are strongly in contango as is currently the case. Here, we discuss the transmission channels of oil price changes to the performance of other assets, analyse the correlations and sensitivities and suggest various ways of gaining indirect oil exposure. PAGE 2: WHEN OIL PRICES MOVE, OTHER ASSETS TEND TO MOVE, TOO PAGE 2: THE TRANSMISSION CHANNELS OF OIL PRICE CHANGES PAGE 3: HISTORICAL SENSITIVITIES PAGE 5: DISCLAIMER AND CONTACTS 1

2 WHEN OIL PRICES MOVE, OTHER ASSETS TEND TO MOVE, TOO Oil prices have moved considerably over the last year. The price of oil collapsed by 55% from June 214 to January 215 and rebounded by almost 3% in February. Oil-implied volatility, as measured by the CBOE Crude Oil ETF Volatility Index (OVX), skyrocketed from 14% to 63%, the highest level since 28/9. Large oil price moves tend to go hand in hand with moves of other assets. One example is the well-known negative relationship between the USD and the oil price, which results mainly from the fact that oil is denominated in USD but predominantly produced and consumed in other currency areas. However, we can observe many other relationships (see Chart 1 for some examples) that investors need to be aware of to judge and steer the overall oil exposure of their portfolios. Chart 1: The decline of the oil price over the last year went hand in hand with moves in other assets (1 June 214 = 1) Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 OVX Index (percent, right axis) NOK/USD MSCI Lat Am/MSCI Japan WTI MSCI World Energy/Airlines Dollar trade weighted In addition, indirect oil exposure is the only way for investors not in a position to buy commodities or commodity futures to gain oil exposure. If oil futures curves are strongly in contango as is currently the case indirect oil exposure may be an even more attractive way of gaining oil exposure. Losses due to roll costs over 12-month periods have reached levels of more than 6% in the last 2 years. Chart 2: Currencies of oil net exporters should be most strongly affected by oil price changes 1..5 THE TRANSMISSION CHANNELS OF OIL PRICE CHANGES Observed relationships between oil price moves and (relative developments of currencies, asset classes, sector and regions result either from fundamental relationships or due to the fact South Africa India Poland Eurozone Japan Turkey Sweden China New Zealand United States Indonesia Switzerland Australia United Kingdom Denmark Brazil Canada Russia Norway Venezuela Iraq Saudi Arabia. that oil and the assets are simultaneously driven by another driver (spurious relationship) such as an acceleration or Yearly net imports in litre/gdp USD (212) Yearly net exports in litre/gdp USD (right axis, 212) deceleration of global growth. Source: CIA, Commerzbank Research Fundamental relationships are either a result of the effect of oil price changes on inflation and inflation expectations or of the wealth transfer between oil producers and oil consumers when the oil price moves. The former affect the (relative) performance of assets such as inflation-linked and nominal sovereign bonds or gold. Moreover, sustained shifts in inflation or inflation expectations may trigger (expectations of) changes in monetary policy, which in turn again affect the performance of assets. The latter can be observed at the macro, corporate and endconsumer levels. Chart 3: EMEA and UK equity markets with particularly high weight of energy-related stocks Sector weight, in percent At the macro level oil net exporters (see Chart 2) tend to be most affected. Declining oil prices are a threat to their budgets and current account balances. Their currencies tend to depreciate with falling oil prices. On the flip side, energy intensive and energy importing countries, in particular, should see relief to their budgets and current account balances supporting their currencies if oil prices decline. Japan US Europe ex UK EM Asia Energy Material Energy & Materials Pacific ex Jap LatAm UK EMEA At the corporate level, both companies related to oil production and companies with energy-intensive production, such as 2

3 Chart 4: Correlation and sensitivity of currency vs the USD to oil price changes Chart 5: Correlation and sensitivity of asset classes to oil price changes RUB CHF.2 JPY -.2 USD trade-weighted -.4 AUD NOK BRL ZAR IDR SEK CAD NZD TRY DKK EUR GBP INR CNY Crude Oil.8 Energy.6.4 US Inflation Commodities Linker.2 US REITs US Treasuries Gold US Equities US Credit Cash US HY aluminium producers or airlines, are directly affected by shifts in the oil price. Regional equity and corporate bond markets have different exposures to these sectors. Therefore, the relative sector performance feeds through to relative regional performance of equity or corporate bond markets. Chart 3 illustrates that, in particular, the EMEA and UK equity markets have a high share of energy companies, while Japan has a particularly low share. As this is correlated with the currency effect of the oil price discussed above, the EMEA and UK regions should clearly suffer from falling oil prices while Japan benefits and vice versa. Regarding high yield corporate bonds, it is worth noting that the USD high yield market has a 12% share in the oil and gas sector, while this share is less than 1% in the EUR high yield market. Oil prices have moved considerably over the last year. The price of oil collapsed by 55% from June 214 to January 215 and rebounded by almost 3% in February Finally, at the consumer level, a change in the oil price usually means a change in disposable income available for other expenditures. Consequently, consumer-related equities and corporate bonds should be positively affected by declining oil prices and vice versa. This should be more pronounced for consumer discretionary areas than consumer staples and, in particular, for those related to oil, such as airlines or car manufacturers. HISTORICAL SENSITIVITIES Our analysis of historical sensitivities and correlations is based on weekly total return data over the last 2 years. The price of WTI crude oil in USD is used to measure the oil price. We analyse currencies, asset classes, as well as equity and REITs sectors and regions. 1. Currencies The first thing that Chart 4 reveals is that all currencies except JPY tend to appreciate versus the USD when oil prices rise. This is mainly due to the fact that oil tends to depend causally on the USD rather than the other way round. Oil prices are denominated in USD while oil is predominantly produced in countries with other currencies. An appreciation of the USD means that one USD buys more oil from other currency areas, and the oil price in USD declines. Chart 4 also shows the high sensitivities of the so-called commodity currencies to the oil price. In particular, Norway and Canada, but also Australia, were highly correlated with WTI moves in the last 2 years. On the other hand, net importers with defensive currencies like Japan and Switzerland, but also China, showed less sensitivity in the last 2 years. The latter should not just be because China is a major oil importer, but largely because the CNY has been a managed currency. As a special case, Japan has a difficult relationship. Surprisingly, the Russian rouble seems relatively unaffected to oil price changes of the last 2 years, but it is likely to be more strongly correlated to changes in the price of Brent rather than the price of WTI. 2. Asset classes Looking at correlations and sensitivities of asset classes to the change in the oil price, it is not surprising to find that the commodity asset class and, in particular, the energy sector within commodities, are the most strongly related (see Chart 5). The rest of the picture reveals a clear cyclical relationship. 3

4 As a result of the common driver, economic growth, oil price moves have a positive relationship with equities, REITs and high yield but a negative one with other fixed income. The inflation channel however, shows that gold and inflation-linked bonds have at least a slightly positive relationship with changes in the oil price. By equity region, EMEA and LatAm are most positively correlated with the oil price, both in local currency terms and in USD Chart 6: Correlation and sensitivity of the relative performance of equity sectors and industry groups to oil price changes ENERGY Div Financial. MATERIALS Automobiles CONS. DISCR. IT INDUSTRIAL CONS. FINANCIALS - STPL. UTILITY Insurance TELCO - HEALTH- Health Care -.15 CARE Equipment Equity sectors (in uppercase) Industry groups 3. Equity sectors and regions Looking at the relationship of the relative performance of equity sectors and oil (see Chart 6), the cyclical pattern again shows that the energy and material sectors are clearly positively correlated the energy sector tends to outperform the MSCI World index by 2pp when the oil price rises by 1% while defensive sectors such as health care, consumer staples and utilities show a negative relationship. It is worth noting, though, that the consumer discretionary sector, which is typically deemed cyclical, shows a negative relationship with the oil price. As argued above, this should be due to the fundamental effect of the oil price. First, a rising oil price is negative for the energy-intensive airlines in this sector; and second, a rising oil price lowers the disposable income of consumers for discretionary spending. By equity region, EMEA and LatAm are most positively correlated with the oil price, both in local currency terms and USD (see Chart 7). Among emerging markets, EM Asia seems less positively related. This clearly reflects the fact that Asian economies are predominantly oil importers and, at the same time, have a relatively low weight of the energy sector in their equity markets. Japanese equities show the lowest relationship with oil, both in USD and local currency terms. In the case of the former even less than in the case of the latter, as the JPY/USD is negatively correlated with changes in the oil price as discussed above. In local currency terms, Europe is only marginally more strongly correlated with the oil price than the US, which should be due to the high energy sector weighting of UK equities. In USD, the positive correlation with oil increases due to the positive correlation of most European currencies versus the USD with the oil price. Chart 7: Correlation and sensitivity of equity regions in local currency and USD to oil price changes Asia Local Japan Local Japan USD Pac ex Japan USD Asia USD Europe Local S&P 5 Pac ex Japan Local Europe USD Lat Am Local Lat Am USD EMEA USD EMEA Local Equity regions in local currency Equity regions in USD SUMMARY Observed relationships between oil price moves and the performance of other assets result either from fundamental relationships or are due to the fact that oil (and the assets) are simultaneously driven by another driver (a spurious relationship), such as an acceleration or deceleration of global growth. Investors aiming to gain indirect oil exposure should look for positions that are justified by both the cyclical relationship and the fundamental connection. Against this backdrop, positions such as EMEA and LatAm equity long and Japanese and EM Asia equities short, energy stocks long and airline or car companies short or a long basket of NOK / JPY, CAD / JPY and RUB / JPY, are examples of appropriate indirect oil exposure. 4

5 Disclaimer This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or the group companies mentioned in the document ( Commerzbank ). Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. This is a financial promotion/marketing communication (together communication ). It is not investment research or financial analysis as these terms are defined in applicable regulations and has not been prepared by a research analyst. The views in this communication may differ from the published views of Commerzbank Corporates & Markets Research Department and the communication has been prepared separately of such department. This communication may contain short term trading ideas. Any returns or future expectations referred to are not intended to forecast or predict future events. Any prices provided herein (other than those that are identified as being historical) are indicative only, and do not represent firm quotes as to either size or price. This communication is for information purposes only. The information contained herein does not constitute the provision of investment advice. It is not intended to be nor should it be construed as an offer or solicitation to acquire, or dispose of, any of the financial instruments and/or securities mentioned in this communication and will not form the basis or a part of any contract. Potential counterparties/distributors should review independently and/or obtain independent professional advice and draw their own conclusions regarding the suitability/appropriateness of any transaction including the economic benefit and risks and the legal, regulatory, credit, tax and accounting aspects in relation to their particular circumstances. Levels, bases and relief from taxation may change from time to time. Any information in this communication is based on data obtained from sources believed by Commerzbank to be reliable, but no representations, guarantees or warranties are made by Commerzbank with regard to the accuracy, completeness or suitability of the data. The past performance of financial instruments is not indicative of future results. No assurance can be given that any financial instrument or issuer described herein would yield favourable investment results. This communication is intended solely for distribution to Professional Clients and/or Eligible Counterparties of Commerzbank. It is not intended to be distributed to Retail Clients or potential Retail Clients. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this communication. Commerzbank and/or its principals or employees may have a long or short position or may transact in financial instrument(s) and/or securities referred to herein or may trade in such financial instruments with other customers on a principal basis. The information may have been discussed between various Commerzbank personnel and such personnel may have already acted on the basis of this information (including trading for Commerzbank s own account or communication of the information to other customers of Commerzbank). Commerzbank may act as a market maker in the financial instruments or companies discussed herein and may also perform or seek to perform investment banking services for those companies. No part of this communication may be reproduced, distributed or transmitted in any manner without prior written permission of Commerzbank. This communication or the manner of its distribution may be restricted by law or regulation in certain countries. Persons into whose possession this document may come are required to inform themselves about, and to observe any such restriction. By accepting this communication, a recipient hereof agrees to be bound by the foregoing limitations. This communication is issued by Commerzbank AG and approved in the UK by Commerzbank AG London Branch, authorised by the German Federal Financial Supervisory Authority and the European Central Bank. Commerzbank AG London Branch is authorised and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct authority and Prudential Regulatory Authority are available on request. Italy: You should contact Commerzbank AG, London Branch if you wish to use our services to effect a transaction in any of the financial or other instruments mentioned in this communication. Japan: Not for distribution in Japan US: Not for distribution in United States Canada: Neither Commerzbank AG nor any affiliate acts, or holds itself out, as a dealer in derivatives with respect to any Canadian person, in Canada as a whole or in any Canadian province, and nothing contained in this document may be construed as an offer or indication that Commerzbank is or stands ready to (in each case, with respect to a Canadian counterparty or within Canada) intermediate derivatives trades, act as a market maker in derivatives of any kind, trade derivatives with the intention of receiving remuneration or compensation, solicit (directly or indirectly) derivatives transactions, provide derivatives clearing services, trade with a nonqualified Canadian party that is not represented by a derivatives dealer or adviser, or engage in activities similar to those of a derivatives dealer. Copyright Commerzbank 215. All rights reserved. Commerzbank Corporates & Markets Frankfurt Commerzbank AG DLZ Gebäude 2, Händlerhaus Mainzer Landstraße Frankfurt am Main Tel.: London Commerzbank AG London Branch 3 Gresham Street, London EC2V 7PG Tel.: