Nicolo Carpaneda, an investment director at M&G Investments, explains: “There are a number of risks we need to monitor. The most difficult is that, given how sensitive the market has been to commodities, oil price movement is a big risk factor. The industry supply dynamics continue to show we will have oversupply in the market, so oil prices will continue to be low, but trends are difficult to capture. If oil prices are going to crash suddenly, they will cause losses across asset classes.”
Last year, with the oil prices falling, everyone was scared, he said. “Everyone sold the risky assets, but it is interesting to see that low oil prices are bad news only for oil exporters and energy companies. They are good news for everyone else because consumers save money at the pump, governments importing oil save money as well. So why do people got concerned about oil?”
The answer is that there is a general misconception regarding the correlation of oil prices and global economic growth.
“In the absence of data last year, everyone was concerned about any issue in the momentum of oil. When oil prices fall, that means there are problems with global growth,” he said.
At the end of 2015, signs for global economic growth were not encouraging, at around 3%, but it was not as bad as some were assuming. “With oil prices going down, everyone in the market has been assuming that a recession was coming. With the market pricing for a recession, every risk asset class has been selling off.”
In fact, the oil price falls were mainly due to oversupply, he said, adding there was an industrial oversupply in the market. Saudi Arabia, which is the biggest marginal oil producer, has been producing far more oil than before to push the US companies out of business.
Currently, oil prices are around $35 to $40 a barrel for WTI, and Carpaneda expects that they could retreat to $30 toward the end of December though they may rise to $40 to $45 in 2017.
Carpaneda said he was heavily underweight the energy sector 18 months ago, as he believed the oil price was unlikely to sustain a value of $100 per barrel.
Apart from energy, other portfolio changes over the last six to 12 months include an underweight in the healthcare sector, as the sector was relatively expensive, and additional TMT company exposure. Despite the mediocre growth of TMT companies, they are generating cashflow continuously, he said.
