Edmund Shing:
Hello and welcome to a new podcast from BNP Paribas Wealth Management. I am Edmund Shing, Chief Investment Officer.
In this podcast, I would like to take the opportunity to answer more client questions. We did this last week, and this is the second round of questions that we would like to answer in this podcast. Four questions we're going to answer.
Firstly, starting with oil markets. Do oil markets underestimate longer-term effects of supply disruption?
The current pricing of Brent crude oil futures suggests that there will be a sharp fall in prices for oil between June of this year, where it's currently priced at one hundred eleven dollars a barrel, and December. So for December deliveries six months afterwards, we then see a fall in prices to just eighty-two dollars, so that is twenty-nine dollars a barrel lower. So this clearly prices in expectations of a rapid de-escalation of the current Iran conflict and on fairly near-term resumption of maritime traffic via the Strait of Hormuz, including of course exports of oil and gas from the Gulf.
However, I think we should not assume that even under these optimistic assumptions that both oil and gas supply disruptions will disappear in the near term. It'll take months, if not a year or more, for pre-conflict exports to resume, for oil and gas to return to pre-conflict levels. So it's going to take quite a while, and the disruptions are here for the time being at least. The risk, well, clearly, is that spot oil prices may decline, but that longer-term oil prices may rest well above the eighty-two dollars a barrel. Again, pre-conflict we were at sixty to seventy. I think it's quite clear that we are likely at least in the medium term to stay more like at eighty plus, and that still prices in a relatively optimistic outturn in Iran. The risk is that the Strait of Hormuz stays effectively closed for longer, that the conflict drags on, and that oil futures for December and beyond are not pricing in this risk, and therefore that these longer-dated oil prices may rise further.
Question two: Are stock and bond markets more correlated during crises, and if so, should we be thinking beyond just the sixty-forty stock-bond asset allocation portfolio?
I think yes. Historically speaking, the sixty-forty stock-bond asset allocation paradigm has worked very well, really since the mid-nineteen nineties, since nineteen ninety-four. And of course this is based on the idea that when stock markets fall during times of crisis or of economic recession, bond prices are inversely correlated, and therefore bond prices rise when stocks fall, and thus cushion the effect of falling stock prices in an overall portfolio. But this negative correlation between stocks and bonds only holds true when inflation is around two percent, which is what central banks target, so-called price stability. Of course, this was largely the case for the most advanced economies from 1994 until 2021. For so for 27 years, that was fine.
However, since 2022, oil and gas prices have been much higher. Inflation has been therefore way above the two percent. It's only just recently started to return close to two percent in the advanced economies. If we believe, as we do, that oil and gas prices will remain well above pre-conflict levels in the medium term, there is therefore the risk that overall inflation rates might be, for instance, closer to three percent rather than two percent going forwards. And at three percent, the calculation changes because the correlation between global stocks and bonds moves from negative actually to positive.
So, in a more inflationary environment such as 2022, bond yields tend to go up and bond prices therefore go down, pressuring stock prices at the same time via low fair market valuations. And this is exactly what we saw between January and September of 2022. Both bonds and stocks went down at the same time, so you had no real offset to a stock bond portfolio at that time because both legs lost money. Admittedly, the stocks did lose more than bonds, but the point is, when stocks went down, bond prices did not go up and partially offset the fall in stocks. And in fact, if you look at 2023, 2025, and April around Liberation Day, or even of course March this year, the same has happened. When stocks have gone down, bonds have also gone down at the same time. So it seems quite clearly that bonds and stocks in this new paradigm are increasingly positively correlated.
What that therefore means is that holding stocks and bonds in a portfolio is not enough. You need to diversify beyond just stocks and bonds. We recommend allocating to commodities, particularly gold. We like infrastructure, either listed or private, and hedge and alternative use it funds. All of these we believe improve portfolio diversification and robustness over time.
Question three: Will current high oil and gas prices drive increased demand for renewable energy generation and storage solutions?
In our view, yes. For energy-importing regions such as Asia and Europe, today's environment of painfully high energy prices is sure to refocus efforts on improving national energy security. This will better protect these regions from future energy supply disruption and inflationary price volatility. Interestingly, even the US, which is today the largest producer of hydrocarbons in the world, is not immune to global energy price volatility. US retail gasoline and diesel prices have surged by between 30 and 40 percent since early March. So even consumers and companies in the US have been hit by Middle East conflict. For Europe and Asia, we do expect greater investment in renewable and nuclear energy electricity generation, as a result of what's going on currently, to improve the robustness of electricity grids, we also expect Europe to follow China, investing increasingly in battery electric storage systems to sit alongside solar and wind, and to smooth electricity output in national grids. Longer term, who knows? This could also spur a greater push towards alternatives to diesel for shipping and road freight in the form of hydrogen fuel cells.
Question four: Is the current strength of the U.S. dollar sustainable, or should we expect a weaker dollar over time?
We should put the current strength of the U.S. dollar into context. The Bloomberg U.S. Dollar Index rallied a mere three percent since the recent low in late January, and of that, two percent has come over March. According to this index, the U.S. dollar is still eight percent weaker than at the beginning of 2025, and has essentially traded sideways since middle of 2025. So on this basis, the safe-haven status of the dollar is not that strong at all. And remember, at the same time, the U.S. government is spending an additional one to two billion dollars a day on this conflict, and this is not in their budget. According to their pre-existing pre-conflict budget, they were already set to run a budget deficit at the federal level of over six percent of GDP this year. So that's going to be even worse post all this extra military spending. The combination of higher inflation and these greater debt refinancing needs have indeed already pushed the 10-year U.S. Treasury bond yield up to 4.3 percent from 3.9 percent pre-conflict.
We believe that lower recycling and Middle Eastern oil and gas revenues into U.S. dollars in future, combined with greater near-term U.S. debt refinancing needs, together will ultimately lead the U.S. dollar lower against major currencies, and we're maintaining our 1.20 twelve-month euro dollar target versus 1.16 today.
Thank you very much for listening to this podcast from BNP Paribas Wealth Management. Please like, share, and subscribe to our series of podcasts. And until next week's podcast, thank you for listening, and until then, goodbye.