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
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.
The difficulty remains the real magnitude of this impact."
Commodities: what are the
strategic and tactical asset
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. www.am.natixis.com 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
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
repatriation of capital invested outside Japan.
Natural gas 26%
Source: Energy Information Administration â€“ 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
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
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
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).
///// Contact us: firstname.lastname@example.org Written on 01/04/2011
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Natixis Asset Management - Communicaton department - April 2011 - Eco-friendly printing- Cover picture: © Elena Elisseeva / Shutterstock - Inside pictures: © Fabrice Vallon