We believe that the dramatic fall in oil prices has to be positive for both global business – obviously excluding most energy companies – and consumers. However the evidence suggests that the latter have yet to spend their windfall although it is likely that they will if, as we expect, prices remain lower for a protracted period.
The bear market in oil and industrial metals has been caused by a combination of weak global demand including a significant slowdown in the Chinese economy over the past few years, and abundant supply. This is particularly true for oil, where the US shale gas revolution has been a real game changer while Iranian production now coming back on stream has only served to depress prices further.
From an investmentstand point the commodities sector has certainly been one to avoid and even more so the gold and natural resources funds, where declines of more than 50 per cent over the past five years are commonplace. Meanwhile the decline in commodity prices has also hit the big producing regions and countries such as Latin America and Russia while it is also having a knock-on effect on the US high-yield sector with energy names making up a significant amount of the index. Defaults may be very low at the moment but an increase appears inevitable.
As for the future, now may be a good time to dip a toe in the market but for us it will only be for our higher growth mandates and with a view that it may well be several years before we reap the rewards.
David Hambidge is director of multi-asset funds at Premier Asset Management.
Many investors have been shocked by the recent falls in oil price and the impact it has had on other asset classes. However, oil price volatility is not rare. Over the past 40 years, oil has always been a volatile commodity. Indeed, the falls over the past year are not that large compared to historical precedents.
From an asset allocation perspective, commodity-sensitive equities, emerging market debt and high yield have been most affected by oil price volatility. Falls in the oil price have always had an impact on other asset classes. However, nowadays the transmission mechanism has evolved and commodities are an asset class in their own right. Commodities are more investable than ever before and there are in excess of 5,000 ETFs or funds available for investors to purchase, yet the recent volatility has meant many have deserted the asset class over the past year. They show little signs of returning soon.
Taking a medium-term view, the lack of willingness of Opec and other oil producers to restrict supply means the oil price is unlikely to bounce back to the levels we saw last year. It is, however, expected to remain volatile, which has historically been the case after such a fall. With Iran looking to supply more to the market, disharmony within Opec, greater efficiency from shale producers and not to forget the constant moving spectrum of geopolitical risk, the rollercoaster ride for commodities and oil in particular is likely to continue.
Justin Onuekwusi is multi-asset fund manager at Legal & General
Commodity prices have been severely hit in recent months by a combination of both supply and demand factors.
Given almost seven years have passed since the global financial crisis, it is perhaps surprising that oil today is trading at or below its 2008 lows. Interestingly, though, this is less an issue of demand, and more the glut of supply, caused by well-publicised factors such as US shale and Saudi’s relentless ramp-up of production.
We believe these factors are not going away any time soon and with Iran’s sanctions being imminently lifted, that will bring another major player to the market, meaning we must remain bearish on the outlook for oil. The impact on the global economy is significant, with headline inflation in many countries already hovering around 0 per cent, and further deflationary pressures likely.
One area that will inevitably be affected by further falls is the high-yield market, and we have already seen substantial underperformance of both the energy and basic material sectors. Defaults have already started to increase and have been dominated by both sectors, with 42 per cent of default volumes year-to-date by energy companies.
Last month Chesapeake Energy cut its dividend and substantially reduced capex, demonstrating action is required for these companies to survive a lower commodity price environment, and indeed in Q2, energy represented almost half the dividend cuts for the S&P 500. It will be important to watch commodity producers and particularly their sovereign debt and currencies, as for example the Brazilian Real has depreciated a staggering 30 per cent in the year-to-date alone.
Lucy Walker is a fund manager of fund of funds at Sarasin & Partners