Liz Ann Sonders, chief investment strategist at Charles Schwab, argues that ‘Oil prices have been steadily increasing over the past few months. However, we believe that a reversal may be on the cards. One of the reasons for this is there has been a marked shift in demand away from the industrialised world toward the dominant emerging regions, including China, India, the Middle East and Russia. However, the pace of demand growth in these areas has not changed significantly and, in fact, has actually slowed a bit. In other words, we are not experiencing a demand shock.

‘In fact, demand from the world’s biggest oil consumer, the United States, has been declining quite sharply. A bigger contributor than demand has been supply, but this problem has been developing over time. The tightening between supply and demand, now viewed as chronic, has been a long time coming. In fact, over the last ten years, global oil reserves have increased by 140 billion barrels, to 1.2 trillion barrels. Over that same span, the increase in world oil demand has been a benign 45 billion barrels. So if supply and demand are not causing the immediate increases, then it does appear speculation has a lot to do with the current changes.’

Sonders concludes, ‘So with the supply and demand situation not looking as bleak as expected, coupled with our contention that this speculative phase should have a limit, oil prices should abate in the near to medium term. But, of course, at this early stage, our view is only speculative.’

Starting from a higher base
Indeed, growing numbers of fund managers are taking the alternative view that, although there may be some retrenchment from current levels, high oil prices are now a fact of economic life. Dominic Rossi, Threadneedle’s head of equities, argues, ‘Oil analysts have been consistently behind the curve as the oil price has risen and we think they are still behind the curve now. We can’t see oil falling below US$100 from here and it is time investors accepted triple-digit oil and started positioning portfolios accordingly.’

He adds, ‘Sustained high oil prices have many implications. At the country level we are seeing a massive transfer of wealth from oil-importing nations to oil-rich countries, and the big winners in this regard are markets such as Brazil and Russia. As these countries get richer and credit becomes more widely available, we are also seeing the development of consumer-related sectors like retail, real estate and mobile telecoms.’

Growth in Uruguay
Elsewhere, the interest in agricultural commodities continues to build, with attention particularly focused on Latin America. Hugh Hendry, chief investment officer at Eclectica Asset Management, which runs the CF Eclectica Agriculture Fund, is currently turning his attention to Uruguay, arguing, ‘The country has much potential. The west is competitive for soybean production, while further east the gently rolling terrain and mild climate are perfect for raising dairy cattle.

‘Furthermore, the political environment is far more attractive than Argentina for potential investors. With a population of only three million people sandwiched between the two regional superpowers of Brazil and Argentina, Uruguay benefits mostly from liberal policies of free trade with its neighbours. As such, farmers are able to export as much as they like without tariffs, duties or quotas. A history of the Uruguayan stock market shows that Uruguay booms when agriculture booms. The golden years were in the late 19th century and the early 1950s. But now things have changed. Apparently we were the first foreign investors our stockbrokers had seen in a decade.’