In a previous article I discussed the huge current account surpluses that some oil producing countries have accumulated in the last four years and how this has implications both from an asset allocation and an asset pricing perspective. I focussed there on where the inflows have been channelled from oil producing countries. I would like now to pay a bit more of attention on the asset pricing side of this story. Has the inflow from oil income affected asset prices worldwide? Which assets have been affected most?
There are mainly three stories on the effect of these flows into asset prices. First explanation sustains that these inflows are responsible for the conundrum of the very low yields of government bonds in the back of the interest rate curves worldwide. Even though it seems a very appealing explanation it has small academic support. Whereas some scholars have found a strong relationship between low yields for long term government bonds and Asian flows, they have failed to find the same relationship with oil producing flows. Second explanation posits that oil surpluses have been invested in riskier assets. An important amount of oil producing surpluses has been targeting corporate bonds and acquisitions. A clear example is the acquisition mood of some Russian firms such as Gazprom or Lukoil. This might explain the smaller spread between government bonds and similar corporate assets, the decrease in the credit spreads of emerging markets or the boom of some equity markets. Even if it sounds appealing and there is lot of anecdotic evidence, there is not much academic empirical evidence supporting this view. Last view postulates that these oil surpluses have gone into markets geographically close to where they were generated. This explains the booming prices in real state and equities in the Gulf (in countries such as Dubai). However this effect would only explain a very small part of the flows.
So it seems that there are many stories but not a consensus.