In addition to concerns about GIPSI sovereign debt defaults in the 16-nation euro zone, the U.S. is grappling with its own deficits and the high jobless rate, while China began restricting lending last month to prevent high inflation.
Some analysts expect global commodity prices would eventually firm up reflecting economic recovery albeit high volatility; and fundamentals should increasingly dominate expectations and drive prices.
But there are others who see the current "correction" as caused by factors very similar to those that brought on the "financial crisis of 2007-2010" and warned this could signal "a new crisis in development."
Seeking Negative Beta
In this environment, a defensive play would be to invest or allocate a portion in regions that are less prone to the price of oil, which is a significant sovereign risk factor. Sector wise, agriculture and alternative investment vehicles in real estate or land development should provide some good diversification to any long term portfolios.
Jeff Rubin, Chief Economist at CIBC World Markets pointed out that the United States is less sensitive to oil price volatilities because it is itself an oil producer (5 million barrels out of 19 million barrels the US consumes are produced in the US), so it receives some of the benefit of both higher and lower oil prices. An IEA analysis also indicated that the U.S. should be less affected by oil price shocks than Japan, OECD and Euro zone. (Fig. 4)
This competitive edge probably partly explains how investors still see the U.S. dollar as a safe haven, and Mr. Geithner's optimism that more debt won't hurt the U.S.'s credit rating, in spite of the fiscal and economic challenges quite similar to what the Euro Zone is facing.
BRIC minus R
In addition to the United State, GDP growth in Brazil, China and India could get a boost from the softening and stabilizing of oil prices and should increase their competitiveness. Brazil and "Chindia" are all oil producers with aggressive state-sponsored exploration and production efforts and strong economic growth prospects. Brazil, with a new and improved investment grade credit rating, is now largely self-sufficient and has insulated its economy from oil price shocks on net basis.
The economic impact of oil prices on oil-importing, developing countries such as China and India could be more pronounced primarily because Chindia are more energy-intensive due to a strong growth rate, and less energy efficient. From that perspective, Chindia, despite good prospects could be more of a roller-coaster ride for investors.
Among the emerging economies, lower crude oil prices will be a big dampener for the Russian economy. Russia's two oil wealth funds declined by a total $1.54 billion over the last month, as more funds were transferred to aid federal budget shortfalls. The Reserve Fund, one of Russia's two oil wealth funds, is expected to run out by the end of 2010.
(Hat Tip: Professor Pinch)
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