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Crude for thought

We have enjoyed a fantastically profitable run from our “energy” theme in recent months but we have called time on this bet and taken profits.

Despite some commentators predicting $200 oil, we are far more cautious about the outlook for crude. In recent months, the US current account deficit appears to be stabilising. This is remarkable, given how much is being paid for oil and therefore the “ex-oil” numbers must be vastly improved.

This is likely to be positive for the dollar as one of the drivers behind the rise in the oil price is dollar weakness. The improvement in the balance of trade should come as no surprise, given that currency weakness has made US goods and services more competitive. However, the flip side of this is that imports into the States from emerging nations must be lower.

Once this trend becomes clear to all, this will trigger a dollar rally which in turn will bring the sharp appreciation in oil to an end for now. Of course, this in itself will further reduce the deficit and form a virtuous circle.

In this scenario, domestic demand accel-erates. Therefore, the very loose monetary conditions we are enjoying would no longer be appropriate. These conditions have provided some of the liquidity which has driven the commodities spike and a tightening of policy would bring about some weakness in the sector which would take pressure off resource-dependent countries and chronic inflation problems would ease.

Conversely, we are looking hard at making our first investment into the Middle East. Being resource rich, the Gulf nations are significant beneficiaries of the “change in world order”. Their industrial and infrastructure development will continue apace, whether crude trades at $75 or $130 a barrel. Access to local oil is providing the Gulf Cooperation Council countries with an enormous competitive advantage.

Surplus cashflow into the region over the next decade is estimated to be $9tn. This assumes that the oil price averages $100 a barrel during the period. Given that the total population of the GCC is only 35 million, this is pretty significant on a per capita basis.

All in all, the outlook for the GCC equity market looks bright. It reminds us of the comment recently made to us by a shrewd investor that “different people have the money this time”. An easy trap is to get bearish about markets when in reality the majority of reasons to worry apply to the UK rather than to the world as a whole.

Nick Greenwood is manager of the CF Midas accelerated fund

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