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newsletter April 2011

"Japanese crisis, commodities, energy: what are the scenarios?" Natixis AM Workshop - 23 march 2011 "The recent events affecting Japan, soaring commodity prices and the n

Japanese crisis,

resurgence of the nuclear issue are not

commodities, energy: what

without impact on the strategic and

are the macroeconomic

tactical asset allocation of our portfolios.

impacts? n

The difficulty remains the real magnitude of this impact."

Commodities: what are the

strategic and tactical asset

Pascal Voisin

allocation options?

Chief executive officer of Natixis Asset Management


Energy policies: what is the

read-across for investment strategies? All questions addressed during the Natixis Asset Management Workshop attended by some 200 participants on March 23rd and introduced by Pascal Voisin, chief executive officer, Philippe Waechter, chief economist, Franck Nicolas, head of global asset allocation & ALM, HervĂŠ

4 points to note: n 15 months after the Kobe earthquake, Japan had recovered 98% of its pre-earthquake

industrial output. Even if the current situation is more serious, particularly due to the damages caused by the failure of the nuclear plants, the country has shown significant ability to mobilize its population and solidarity. n The oil price is certainly high but the barrel is not currently more expensive than in 1864, in constant dollars. What has changed, however, is the need to factor in a structurally high price given the direction in the level and structure of demand. n In 2040-2050, the world will have 9 billion inhabitants. The resulting explosion in commodity demand will run up against dwindling and increasingly inaccessible fossil fuel resources and will cause problems of supply security. n Lastly, the Japanese shock could begin the debate on the role of nuclear that was sidelined in Copenhagen, changing the approach and the solution to world energy needs.

Guez, head of extra-financial research, Brigitte Le Bris, head of international fixed income and currencies and Emmanuel Bourdeix, CIO equities asset allocation and structured products. The Natixis Asset Management Workshop on March 23rd gathered some 200 participants. CORPORATE AND INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES

What are the macroeconomic impacts? "Beyond the human drama, the Japanese tsunami will have a limited impact on the global economy. Uncertainties will, however, remain as to the economics consequences of the nuclear shock..."

Philippe Waechter Chief economist

The situation in Japan

Uncertainties remain as to the nuclear shock Investors in the markets expect the nuclear risk to be

A limited impact on the Japanese economy


The regions affected by the tsunami represent 6 to 7% of the

Were the shock to prove more serious, they would modify

Japanese economy, which is significant.

their positions. Increased risk aversion and concerns of

The existing research suggests that an earthquake in a

contagion for the United States and Europe would weaken the

developed country ultimately has an extremely limited impact

trend in global economic growth and the markets. Higher risk

and does not generally prompt a collapse in economic activity.

aversion is feared, which would have dramatic implications for

The 1995 Kobe earthquake led to an immediate 2.7% loss in

global economic activity. Nuclear effectively represents 27%

industrial output, followed by a rapid rebound such that there

of electricity generation in Japan. (Cf below)

was no adverse impact on the growth dynamic. The limited impact was explained by the effective functioning

Sources of electricity generation in 2009

of institutions, the qualification level of the population (work can replace capital, facilitating the rebound in output) and

Hydro-electric 8%

the ability to relocate production in areas unaffected by the catastrophe. Coal-fired 28%

Oil-fired 9% Other 2%

The regions involved will benefit from reconstruction with the most-advanced technologies which will constitute a future advantage. The cost of the earthquake is estimated at 3% or even 3.5% of GDP. Its financing will be ensured by an increase in Japanese debt, a temporary increase in taxes and the

Nuclear 27%

repatriation of capital invested outside Japan.

Natural gas 26%

Source: Energy Information Administration – Natixis Asset Management

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A macroeconomic arbitrage relating to the trend in the energy price can also be seen. An increase in the cost of energy

The nature of the rise in commodity prices has changed

prompts individuals to reduce their spending or opt for more

The equilibrium of the commodities market has changed. Until

spending cannot be compressed. An increase in price is thus

the late 1990s, demand mostly reflected that of the developed

reflected in significant arbitrages to the detriment of other

countries. Any adjustments took place on the supply side. The

goods and services.

efficient use of this energy. In the short term, however, energy

level of prices was rapidly modified and then fluctuated around a horizontal trend as was the case during the 1974 and 1979

The current level of the oil price suggests that arbitrages of this


type may take place, both in the United States and Europe.

Currently, due to the strong growth in the emerging countries,

Furthermore, the higher price of energy increases the oil bill.

the equilibrium has changed. There is rapid demand growth

To maintain the macroeconomic equilibrium, adjustments

from the emerging countries and the price profile of

must be made to avoid a too-rapid deterioration in the trade

commodities is thus rising. It is no longer conditioned simply

balance in commodities which would penalize the internal

by the economic activity in the industrialized countries but is

growth mechanism.

maintained at a high level by robust emerging demand.

CRB Commodities Index

United States - Gasoline price and energy spending by consumers


Base 100 in 2010

250 4.5














1.5 2004

4.50 2005


Gasoline price (weekly)






Weight of energy spending in consumption (right-hand scale)


50 0 1951












Source: Datastream – Natixis Asset Management

Source: Datastream – Natixis Asset Management

The 2000s have seen a major break with the past. The increase in commodity prices that has, historically, been explained by a supply-side shock, is now the result of an acceleration in demand from the emerging countries.


CRB : Commodity Research Bureau

… and leading to diverging monetary policies Since its priority is the recovery in the economy and employment, the US Federal Reserve is focusing more on the underlying inflation rate and is leaving interest rates unchanged. Conversely, the European Central Bank has announced an increase in its policy rates for April to contain inflation. Given

Soaring commodity prices are penalizing the economic players and the markets…

the trend in energy and agricultural commodity prices (two

For the industrialized countries, the increase in commodity

rate could weigh on the internal situation (the third key factor

prices has a significant impact.

in the inflation profile).

The price fluctuations affect corporate margins in that they

This diverging behavior from central banks should support the

cannot automatically be passed on in consumer prices.

euro relative to the dollar.

major components of inflation), the target of a stable inflation

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Commodities: what are the strategic and tactical asset allocation options? "Commodities are a "bona fide" asset class and, due to their decorrelation from the equity market can contribute additional performance..."

Franck Nicolas Head of global asset allocation & ALM

Commodities constitute a real, fully-fledged asset class

Investing in commodities and "operational" control

Commodities have the two main characteristics of all asset

Responsibility Investment perspective, some exclusions or an

classes: a homogeneous universe and a risk premium which

offset via, notably, shared return funds.

is distinct from that of equities. They thus have their role to

Additionally, a long position on this asset class is expensive

play in a portfolio since they can provide an additional source

and may disappoint.

of return, bearing in mind, however, that the diversification

On the other hand, you can "win" even as a buyer when

contribution is differentiated depending on the period.

commodity prices fall by the roll over on futures contracts.

Exposure to commodities may imply, from a Socially

The liquidity of the synthetic replication underlyings can,

One key characteristic: their decorrelation relative to equities

nonetheless, be problematic and generate, over time, a bubble.

Research shows that, on both entering and exiting recession,

to avoid physical delivery.

Purchasing futures implies managing the futures contract rolls

equities anticipate the cycle by around six months whereas commodities tend to perform in line with the cycle. This decorrelation offers investment opportunities during the current reflationary period.

Optimizing returns thanks to tactical allocation within commodities

Different tactical signals enable the exposure to commodities to be optimized by choosing those with the best return, the periods during which to invest, etc. Lastly, the choice of indices is important. Our approach

The differences in cycle between the long-cycle finite

consists of prioritizing those which are balanced in terms of

resources (energy, metals, etc.) and the shorter-cycle

sector to the detriment of those that are significantly focused


on energy.






different investment periods within the asset class even if financialization tends to bring them closer together.

Playing commodities through equities

Similarly, the forward curves enable upside and downside

For those who remain unconvinced, it is still possible to

projections on a one-year view.

play the commodities theme indirectly, through equities,

Lastly, as commodities do not produce income but only

particularly through sector or emerging country baskets. The

generate capital gains, such investment becomes more

link, however, functions differently depending on the period

relevant the lower the level of real rates.

and the emerging market correlation is likely to fall with the diversification of the product-mix in these regions.

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Energy policies: what is the read-across for investment strategies? Following an introduction from Philippe Zaouati, deputy CEO and head of business development, presentations were made on the day’s theme by a number of Natixis Asset Management experts.

Philippe Zaouati Deputy CEO, head of business development

What are the long-term trends for commodities? by Hervé Guez, head of extra-financial research

What are the medium-term energy projections? by Philippe Waechter, chief economist

In 2012 in Brisbane (Australia), the

The trend in emerging country

meeting of international geological

economic growth will not be

experts may declare that we have

called into question and will be

changed era since the industrial

reflected in increasingly strong

revolution. Since the 1800s, man has

demand for commodities. This

effectively had a major impact on the

additional demand from emerging


countries will represent some 90% of the new energy needs

Other than the technical progress, demographic growth* and

over the next two decades.

the new equilibrium between emerging and developed countries

In the short term, this will mean steady upwards pressure

have also been responsible for this increasingly significant impact.

on the prices of all energies, ultimately making arbitrages on

The explosion in commodity demand is going to run up against a

renewable energies easier and less expensive.

limited supply. Known fossil and mineral reserves can be counted

Then there is the issue of the growth and renewal of nuclear

in decades, and not in centuries. To find new reserves, we shall

sites in China and India (for the construction of new plants)

have to go farther still while respecting ever-more-demanding

and in the industrialized countries. Any revisiting of past

human and environmental safety requirements. This implies

choices would be reflected, at constant energy consumption,

structurally higher prices.

in a significant rise in energy prices and an increase in CO2 emissions into the atmosphere.

Can we expect significant commodity volatility in coming years? by Franck Nicolas, head of global asset allocation & ALM

In the medium and long term, the substitution of these sources by renewable technologies may be envisaged.

Volatility should remain high for a

What is the view on renewable energies? by Hervé Guez, head of extra-financial research

very long period since prices are

The increase in fossil energy prices, the carbon constraint and

increasingly escaping the producer

security in the event of extreme weather conditions all point to

cartel. Volatility is high due to the

the development of renewable energies. Solar is currently the



most expensive energy source but also the most promising



linked to population growth and

given its availability and the research and development efforts.

the financialization of the markets which amplify the cyclical

More generally, after a first difficult start-up phase, a second


"euphoric" phase that narrowly missed turning into a bubble,

* Since 1800, the population has increased by a factor of ten whereas it had only doubled in the preceding period

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and a third phase of skepticism, the rise in energy prices and

of England have announced that they are preparing to increase

uncertainty regarding the role of nuclear in the global mix,

their policy rates: in April for the ECB and May for the Bank

could give rise to a new period favorable to investment in this

of England. Since an increase in interest rates by the Fed is


conditional on the recovery in growth and employment, the increase here should be limited.

What impact would higher inflation have on the bond markets? by Brigitte Le Bris, head of international fixed income and currencies

Do you expect a further increase in risk aversion? by Emmanuel Bourdeix, CIO equities, asset allocation and structured products

The impact should be limited and

Prior to the events in Japan,

has already been partly priced

the markets were expecting a

in by long-term bond yields. The

reduction in risk aversion. We have

increase in commodity prices has

since seen an increase prompted

seen inflation average of 2% in the

by concerns about nuclear, the

developed countries and 6% in the emerging countries.

situation in the Middle East but also uncertainties surrounding

We are still far from past levels. The central banks of the

social tension potentially triggered by the austerity plans in

emerging countries have also already started to react with

Greece, Ireland and Portugal.

25 having increased their interest rates, wiping out one third

In the medium term, the abundant liquidity, the low level of

of the interest rate easing cycle realized since the failure of

interest rates even after rate hikes and the improvement in

Lehman. To contain inflation, the emerging countries can also

corporate earnings following the economic recovery all point

play with the level of their currencies. The ECB and the Bank

to a return to a lower level of volatility.

From the left to the right : Philippe Waechter, chief economist - Franck Nicolas, head of global asset allocation & ALM - Brigitte Le Bris, head of international fixed income and currencies - HervĂŠ Guez, head of extra-financial research - Emmanuel Bourdeix, cIO equities, asset allocation and structured products - Philippe Zaouati, deputy CEO, head of business development

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NATIXIS ASSET MANAGEMENT IN BRIEF Natixis Asset Management is the European expert of Natixis Global Asset Management. Based in Paris, it is among the top European asset managers with EUR 302 billion under management and around 670 employees as of 31st December 2010. Natixis Asset Management provides a full range of products and investment solutions in all asset classes for institutional investors, companies, distributors and banking networks. A recognized pioneer with 25 years experience, Natixis Asset Management is also one of the leading SRI managers in France and in Europe. Natixis Asset Management also offers a direct access to different expertise: n in France, in partnership with Dorval Finance, the expert in flexible wealth management and with Natixis Multimanager, a Natixis Asset Management subsidiary which offers both long-only and alternative multimanagement solutions; n in Europe, in partnership with H2O Asset Management, a London-based entrepreneurial venture, specialized in global macro multistrategies, global and emerging bond management; n internationally, via the multi-boutique model of Natixis Global Asset Management and the expertise of other fund managers, notably in the US (Loomis Sayles & Co, L.P., Gateway Investment Advisers, L.L.C....) and Asia (Absolute Asia Asset Management Ltd).

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Natixis Asset Management - Communicaton department - April 2011 - Eco-friendly printing- Cover picture: © Elena Elisseeva / Shutterstock - Inside pictures: © Fabrice Vallon