Petrodollars Won’t Be Making an Asian Stopover

When oil prices slumped, petroleum exporters sold emerging-market assets. Now that OPEC has clinched its first deal in eight years to cut output, expectations are growing for a return of the petrodollar bid for bonds and equities in Asia.

Those hopes could get dashed fairly quickly, though. Compared with a decade ago, the petrodollar recycling story may be different for three reasons.

First, oil exporters from the Middle East to Russia and Venezuela will be way too focused on rekindling domestic growth — and mending government budgets — to worry about investing any windfall. Norway’s sovereign wealth fund, which saw its first withdrawal this year as the government stimulated the economy, is unlikely to land a wad of new cash to spread around.

Even Saudi Arabia, which recently boosted its sovereign wealth fund by $27 billion and plans to swell that further with proceeds from Saudi Arabian Oil Co.’s initial public offering, may be more interested in U.S. assets than making a big play on Asian growth.

Which brings us to the second reason to be skeptical: the appeal of owning assets denominated in dollars.

Conventional wisdom says that crude prices and the U.S. currency move in opposite directions. Higher oil prices should mean a weaker dollar, taking pressure off Asian currencies and improving returns for overseas investors.

But as UBS Group AG strategists note, the causation works from currency to oil, not the other way around. Besides, any lift in U.S. shale investment as a result of higher petroleum prices might lead to faster interest-rate increases by the Federal Reserve, causing the dollar to extend gains.

Finally, UBS analysis shows that an oil-price shock propelled by tighter supply has a much weaker correlation with global equity market returns than one that’s triggered by a revival in demand or a weaker dollar.

For petrodollars prepared to take the risk of currency depreciation, there may be more value in local-currency emerging market bonds than equities.

The jump in Indonesian government note yields to as high as 8.36 percent from 7.25 percent before Donald Trump’s election victory is making them attractive to foreign buyers. Expectations of rate cuts could build in India, extending a rally in domestic debt, if the economy slows sharply because of last month’s ban on high-denomination cash.

For the petrodollar-recycling theme to take center stage, investors need to be confident of China’s growth and yuan stability. As long as both remain up in the air, there’s little chance of the region gaining much from this oil bounty.

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