Oil Carry Trade

By Roger Nusbaum | August 21, 2008 | 1:05 PM | 3 Comments

There have been several commentaries in the last few months about the energy carry trade, most recently today in the Financial Times.

The basic idea is that resource (oil) rich countries are accumulating more and more capital to seed SWFs. This increasing pools of excess capital (not a political comment I am not a liberal) essentially makes it cheaper for them to buy equities or other assets; found money so to speak because of how high oil prices have gone in the last couple of years.

A point made in the FT post is that the SWFs are buying equities that are down a lot but that still no one wants. That is not the worst environment in which to buy equities. The purchases made thus far by SWFs, like Temasek's seemingly sending good money after bad on Merrill Lynch, don't look so great after a period of months but how will they look after a period of years?

From the time Citi bottomed in 1990 at around $3 to mid 2000 the stock went up 3000%. Anyone buying at $10 on the way down may have been very upset but if they held on then that first $7 did not matter. While I don't know about 3000% going forward, some of the financials that have been under the microscope could be ten baggers ten years out from the bottom.

That's great if, like an SWF, you have an infinite time horizon.

For all the coverage about SWFs there doesn't seem to be a lot of coverage about how do-it-yourselfers can benefit from this. I don't have a great answer but I have a thought.

There appears to a divergence in the world these days. Things seem to be getting better for resource rich and other surplus countries and getting worse for resource consumers (ex-China and a few others) and deficit countries.

I think the investment implication is to favor surplus countries over deficit countries in the foreign portion of your portfolio. I would also add that it probably makes sense to keep increasing your foreign exposure. I have had clients at about 35% foreign and I could see going up near 50% as the new decade rolls over.

Countries with surpluses include Singapore, Norway, Canada, Brazil, China, Kazakhstan, Switzerland, Australia (well, budget anyway) and so on. 

I would not go berserk but it is the surplus countries that  by and large have the SWFs which of course is a barometer of economic health. These countries have a much greater margin for error than do the deficit countries.

interesting interesting Submitted by Anonymous (not verified) on Thu, 2008/08/21 - 1:35pm » reply |

really? Your writing is great but increase foreign to 50% exposure after years of a falling US dollar? Isn't it time to lighten up if the dollar is going to rallY/? Submitted by go global (not verified) on Thu, 2008/08/21 - 1:35pm » reply |