Julius Baer: Méjico, perspectivas para los mercados emergentes, gas natural y petróleo

Redacción - Viernes, 09 de Diciembre

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FIXED INCOME Mexico successfully auctions some of its most important areas of deep water oil fields 

 

Yesterday, the Mexican government successfully auctioned and allocated eight of the most important deep-water oil fields in the country. The news is highly positive as the allocation should lead to more than USD44bn in new foreign direct investment, to a significant pick-up in oil production within the country and to gradual but important relief to government finances. The success of the auction also comes at a time of high uncertainty regarding future trade relationships between Mexico and the US, and should help to abate investor concerns about the long-term economic outlook of the former.

The country will benefit from large amounts of new foreign direct investment, which will in turn help to reverse the declining oil production in the country. While investor concerns remain focused on future trade links with the US, this news should help to abate some of the concerns about Mexico’s long-term economic outlook.

 

Alejandro Hardziej, Fixed Income Analyst, Julius Baer

 

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STRATEGY

 

Emerging markets in 2017: Politics taking centre stage 

 

• Emerging markets are still in a trading and not in a trending environment. The past was about central banks and monetary policy. 2017 will be about politics.

• We divide 2017 into two phases. In Q1/Q2 2017 we expect emerging markets to underperform and believe that there is a buying opportunity sometime in Q2 2017. 

 

Our first key message is that emerging markets are still in a trading and not in a trending environment. 2011 to 2015 was about market de-ratings and currency adjustments, while 2016 was about a bottoming process. 2017 will be about politics, a strengthening USD and profitability relative to developed markets. Historically, sustained positive emerging market equity returns have been dependent on the presence of four conditions: i) a positive economic growth gap of emerging markets over developed markets; ii) healthy growth within developed markets themselves; iii) the direction of the USD and iv) supply/demand in commodity markets.

Donald Trump’s election puts emerging markets on hold until his economic policies with respect to immigration, foreign policy and trade become clear at the beginning of 2017. We divide 2017 into two phases. In the first phase (Q1/Q2 2017) we expect emerging markets to underperform the MSCI AC World for two reasons. First, the Trump momentum and as a result the USD could be at its strongest level beginning of the year 2017. A strong USD is by definition negative for emerging markets. Second, the consequences of his economic agenda with respect to immigration, foreign policy and trade should become clearer and reveal positive as well as negative surprises. Best case investors become euphoric and the US equity market, USD and US bond yields overshoot on the upside. In such a scenario emerging markets will overshoot on the downside, which would signal the start of the second phase. We believe in Q2 2017 there is a breaking point to what extent the USD can strengthen and US bond yields can rise at the same time.

 

Heinz Ruettimann, Strategy Research Analyst Emerging Markets, Julius Baer

 

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COMMODITIES

 

Natural gas - price rally on cold weather outlook

 

During the winter heating season, swings in natural gas prices are closely linked to the weather outlook. Yesterday’s move was illustrative. US natural gas prices surged by more than 6% after the latest forecasts pointed at colder-than-usual weather across large parts of the Midwest nourishing expectations of high heating demand and plunging storage levels. However, following a mild autumn storage remains much above the historical norm and it would require a sizeable polar vortex event to significantly tighten supplies and sustainably lift prices. Production softened earlier this year on the back of pipeline constraints and falling investments. However, these constraints are easing as the shale industry revives and today’s oil and gas price levels fuel drilling activity. Rising production and easing power plant demand, coal has become the more economical fuel again, are the trends to watch for next year, which should support adequate sup-plies. In our view, prices of around USD 2.8 per million British thermal units (mBtu) are sufficient to keep the market in balance. In consequence we see more downside than upside from today’s levels and adjust our view to cautious from neutral. Elsewhere, November production estimates show that the Middle East continued to raise production. The announced supply cut thus partially undoes the past months’ output boost which adds to the oil markets over-supply.

Natural gas prices surged on the outlook for cold winter weather and concerns of falling storage levels. However, growing production and softening power plant demand should keep supplies adequate. We see more downside than upside from today’s levels.

 

Norbert Ruecker, Head Commodities Research, Julius Baer

 

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COMMODITIES

 

Sugar: Lifted by rising fuel prices

Sugar rebounded more than 3% yesterday on rising diesel and gasoline prices in Brazil, closing at US19.5 cents per pound. Citing higher oil prices and a weaker currency, the country’s largest energy producer will raise prices for diesel by 9.5% and 8.1% for gasoline, starting today. Brazilian transportation is generally equipped to run on gasoline or ethanol fuels and the price hikes are expected to incentivise the production of more ethanol and less sugar going forward. Heading into 2017, we believe sugar will remain in a supply deficit, depleting the global inventory glut of recent years. As sugar cane harvesting ramps up in Asia we see price risks more to the upside over the coming months. Much of the recent pullback in sugar prices is a result of a weakening Brazilian real, and further declines present the biggest risk to our view.

Sugar prices rebounded more than 3% yesterday as Brazil’s largest energy producer said it will lift diesel and gasoline prices. We have become constructive on the outlook for sugar and slightly increase our price targets.

Warren Kreyzig; Next Generation Thematic Research, Julius Baer

 

 

Oil: Prices to remain in the low 50ies

 

• Oil prices moved into the low 50ies following the OPEC deal. Only full-quota compliance will rebalance the market but it will take time to confirm or dismiss warranted scepticism. 

• We see prices trading sideways for the time being and raised the near-term target to USD 50 per barrel.

 

Oil prices moved into the low USD 50ies per barrel following the Organization of Petroleum Exporting Countries’ (OPEC) decision last week to cut supplies by an unexpectedly high 1.2 million barrels per day. Given the many buts and ifs we updated our supply and demand balances, applying a discount to the headline figure. History suggests that the group’s oil production remains above the pledged 32.5 million barrels per day early next year. The oil market’s surplus is set to persist but no longer increase. Among the caveats of the OPEC deal is the fact that the group recently raised production to oversupplying levels and that the cuts thus partially undo the latest supply boost.

The impact of OPEC’s supply cut on the oil market’s balance, i.e. its effectiveness to curb today’s oversupply and reduce the over-hang in global inventories depends on the group’s compliance to quotas. The oil market is set to remain in limbo in the near term, left in the dark until the production figures reported with delay will either confirm or dismiss compliance to agreed production quotas. Taking further into account the bullish market mood, we raised our three-month price target to USD 50 per barrel and the 12-month price target to USD 47.5 per barrel, both from USD 45 per barrel. However, these adjustments neither change our view on oil nor have any impact on our inflation expectations. It is thus premature to argue the OPEC would not be able to fulfil expectations. Oil prices in the 50ies add further fuel to the reviving US shale boom, which will ultimately offset the intended market rebalancing. Anecdotal evidence of a surge in producer hedging supports this view. Thus, we maintain our neutral view and see oil prices trading at the upper end of the recent trading range. The OPEC deal supports US energy infrastructure and the leading shale companies.

 

Norbert Ruecker, Head Commodities Research, Julius Baer

 

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