We ask industry figures....how can investors take advantage of the turmoil in the Middle East?

Neil Dwane

Manager, the RCM Chartered European trust

BUY OIL E&P

We have essentially three clear and present dangers now in the global economy; the explosion and unsustainability of government debt; the continuing zero rate interest policy responses, which while keeping the financial sector on an aspirator, are fuelling real world inflations especially in emerging markets; and now the rise in oil which should be seen as a global tax.

Shorter term, rising economic and political tensions will see profit taking in equities which have doubled in the past 22 months, but medium and longer term investment opportunities make equities look very attractive as a hedge against further inflationary pressures and a resumption of economic growth.

The Middle East crisis may lead to much higher oil prices in the future, which offers two immediate ways to profit from this trend: firstly to invest in oil exploration and service companies which will see higher revenues and valuations from the oil price and higher levels of investment in oil expenditures; and secondly to invest in sectors and companies which encourage oil use efficiency and alternative energies.

Many of these investments, like wind energy and hydrogen, have been badly affected by the credit collapse in 2008 but could again receive a fresh wave of interest as high oil prices increase the world’s incentive to find a lasting solution for our global addiction to oil.

Julian Chillingworth

Chief investment officer, Rathbone Unit Trust Management

BUY RISK ASSETS CHEAPLY

The overriding consideration must be the level of risk. The situation is changing daily, and it is almost impossible to predict an outcome. For those looking to buy in, oil is the obvious candidate.

Oil is driven largely by supply and demand but also by speculation, which means a volatile ride. In some respects, investors eyeing vehicles that track the oil price have arrived too late as the geopolitical risk premium is pretty much embedded in. It would take a revolt in Saudi Arabia to shock the price higher.

One alternative would be to track the rise in food prices – a phenomenon that will continue post the crisis. Meanwhile, we expect more safe-haven buying of gold and government bonds, albeit on a tactical basis.

Long-only investors, however, should view this as an opportunity to protect their portfolios from the impact of wider inflation (of which oil is just one component), and ensure that they are holding businesses that generate good levels of cash and income. Any pull-back in the Middle East and North Africa situation could also provide a good opportunity to buy risk assets cheaply.

Alan Le Maistre

Assistant investment manager, Ashburton European Equity fund

BUY OIL E&P

How the situation in MENA develops and where the conflict spreads next is impossible to predict, although I should highlight that while much focus has been placed on the risks to Saudi Arabia, it is Iran that worries us the most, still scarred from the Green revolution of 2009. Lasting clarity/security in the region cannot be expected for some time and while uncertainty of production and export remains, the oil price will likely continue to price in a supply risk premium.

Should spot prices continue to rise towards their 2008 highs of $130/$140, the negative impact on the global economic recovery will increase. Heightened inflationary pressures will put more stress on MENA economies increasing the likelihood of civil unrest and contagion of upheavals. Historically it has taken six to nine months for the negative earnings effect of sharp oil price spikes to come fully to light, when autos, chemicals and basic materials companies show the greatest negative impact and only the oil and gas sectors profited.

Exploration and production companies and the integrated majors, with reserves and production centred away from the Middle East are the obvious beneficiaries. What we do know is that socio-economic tensions may lead to a structural shift in capex expenditure, away from the oil and gas industries and into general infrastructure and energy related investments, with a greater onus on socio-economic requirements – the days of cheap Middle Eastern oil production may be coming to an end.

Against a volatile and uncertain political backdrop, foreign direct investment may remain at record low levels and final investment decisions on projects may be significantly delayed. It may become more difficult for European oil service companies to compete with Asian contractors, who are willing to accept a higher risk premium, and offer aggressive pricing and political leverage on the back of bi-lateral trade agreements.

While North Africa accounts for 4% of global oil output it accounts for a far greater proportion of Global LNG capacity (c.14%), with Algeria alone producing 7% of global supply. Much of this supply is imported into Southern European peripheral economies.

If we see heightened risks towards Algerian gas exports we can expect a significant knock-on impact on European spot gas prices. Italy looks equally vulnerable to gas disruption, 50% of Italian power plants are gas powered with the majority of gas (30% from Algeria alone) coming from North African pipelines. Pipeline supplies cannot be re-directed or re-sourced and European economies may be forced to look to Russia for supplemental pipeline supply or increase their dependence on LNG imports.

Angelos Damaskos

Adviser, Junior Oils Trust

BUY SMALL OIL E&P

It appears the Facebook Revolution is gathering strength.  So far, about 1.2 million barrels per day (mbd), of Libya’s 1.6mbd capacity, is said to have been shut down as a result of the unrest.  Short-term this should not be a problem as Saudi Arabia claims to have some 3.5 mbd spare capacity and inventories could be drawn down in the short-term.  However, many analysts question Saudi Arabia’s claims for spare capacity and some even question how much of this capacity is heavier, less marketable oil.

Inevitably, the concern arising from this spreading regional unrest is that some dominoes may fall harder than others. A complete loss of Libya’s production and exports may be made up without difficulty by other OPEC members but any spread of violence to Saudi Arabia and even Iran could seriously de-stabilise supply and cause oil prices to move sharply higher.

We believe investors can benefit from this situation by investing in smaller, exploration and production focused companies, with operations in safer political regions such as the North Sea, West Africa, North America and Latin America. As oil reserves become more valuable on a global basis, these companies should enjoy a strong re-rating.