The recent context of falling oil prices is particularly disturbing for sovereign investors in oil-producing countries, which are undergoing a double punishment, through:
- the correction of prices in financial markets which took place in recent weeks,
- the downward revision in their stream of future revenues.
As a result, they are inclined to review their strategic asset allocation with the objective of making it more robust to the potentially negative effects of future episodes of falling oil prices.
A number of academic papers1 do advocate integrating the sovereign’s overall assets and liabilities in defining the allocation of its financial assets. In the current environment, this has two consequences on sovereign investors whose resources are generated by the exploitation of oil and gas:
- they should diversify their financial portfolio away from these commodities,
- the risk for these sovereign investors to see their government draw on their assets to finance short-term expenditure represents a liability to be taken into account in defining their asset allocation.
Amundi’s latest Cross Asset Investment Strategy2 addressed the consequences of falling oil prices on macroeconomic developments and financial markets. In this paper we propose:
- to construct a strategic asset allocation offering diversification against falling oil prices,
- to check whether our tactical views support a rebalancing towards such asset allocation,
- to add specific Asset and Liability management considerations, particularly in scenarios of declining oil price leading to domestic currency weakness.
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