Stick with oil, says Société Générale Private Banking

In a recent investment strategy report issued by Société Générale Private Banking the group has recommended upholding a defensive investment approach due to economic slowdown, particularly in the eurozone.

The report was written by Xavier Denis (pictured), chief economist at Société Générale Private Banking and its strategist Kim March.

They said the bank would remain overweight on oil stocks as “we do not believe that energy prices will fall significantly. The troubled geopolitical environment in the Arab world and demand that is still sustained by emerging markets constitute a floor for falling prices”.

Although they expect oil supply constraints too loosen up slightly if Libya beings exporting up to 500,000 barrels per day at the end of the year, they expect growth in emerging economies to remain robust and support demand for oil products.

They predict that by the end of 2011, the price of a barrel could fall to $90-100bbl with a gradual return to $100-110 in the first half of 2012.

Denis and March added that defensive stocks (non-cyclical consumption and health) offer the some of the best opportunities at present due to the strengthening dollar and the fact that they are less sensitive to the economic climate.

They believe the low level of valuations, particularly among pharmaceutical companies, represents an additional benefit coupled with the continuing mergers and acquisitions activity in this sector.

The pair also said that information technology stocks will benefit from investment by companies modernizing their IT equipment.

The equity focused section of the report concluded that exposure to cyclical stocks such as industrials, commodities and chemicals should be reduced in the European and US markets due to economic slowdown. This is particularly the case in the Eurozone, they said, where they expect to see zero growth in the second half of 2011.

The private bank’s investment committee has also downgraded its overall hedge fund rating from positive to neutral.

This move is not linked to recent hedge fund performance, the report said, but reflects the investment committee’s opinion that a worsening European crisis would create or increase risks for several hedge fund strategies, notably long/short corporate credit or long equity biased strategies.

By contrast the investment committee has decided to increase exposure to CTA and global macro hedge fund strategies. It believes short-term CTA hedge funds have proven their ability to remain decorrelated over the summer.

Although many global macro strategies posted mixed results this summer, the investment committee believes some are “strong economic houses” that can capture opportunities in the current complex economic environment.

In terms of fixed income investing, they favour BBB rated bonds as “after several months of flight to quality, the risk/reward for investment grade credit has turned favourable.”

There are also ample investment opportunities in foreign exchange, Denis and March noted. They believe the yen will continue to act as a safe haven currency in the coming months and that it is likely to remain stable against the dollar and potentially appreciate against the euro.

They added that several structural factors will sustain emerging market currencies such as the maintenance of trade surpluses for many of these countries, their position as exporters of commodities and their dynamic of internal growth due to investment and consumption.

Société Générale Private Banking was established in 1997 as the wealth management arm of Société Générale Group. Today it has an estimated €75.4bn assets under management.

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