A falling oil price should be viewed as good news

In 2015, we are even more contagion-aware. That doesn’t stop contagion – and concerns about it – coming from surprising sources. Yet rather than worry about how to inoculate clients at the last minute, really good investment advisers may have done this already.

The current market jitters derive from renewed worries about a catastrophic Greek exit from the eurozone and, since around June last year, the dramatically falling price of oil.

A falling oil price should mostly be viewed as good news for all but the oil majors and oil-exporting economies.

Yet we now have to worry about distortions to commodity prices that may not have existed to anything like the same extent a decade ago and certainly not two – especially with a vast amount of oil-related contracts being held as a proxy for the dollar. Some proxy.

There are also implications for shale oil and gas firms, because it has got to a stage where the sector makes up as much as 15 per cent of US high-yield paper.

Clearly such a boom had to be financed somewhere. The bonds could typically offer 9 per cent from small pioneering shale oil firms rather than oil majors.

The risk was also clear – dramatically falling energy prices would mean a serious cash squeeze on this capital-intense industry made up of relatively small players. The fact that oil prices have fallen surprised many – if not most – and yet it was never beyond the realms of possibility that prices could fall dramatically.

Furthermore, oil has always been a significant political weapon. The west may remember that weapon being employed against net importers in the 1970s. But it is not unprecedented for a huge exporter to open its taps to hurt rival exporters and cause a few handy problems for its small US shale rivals too.

A falling oil price should mostly be viewed as good news for all but the oil majors and oil-exporting economies

On that basis, both institutional and retail investors in the UK may well ask how does significant exposure to such bonds end up in mainstream US pension and mutual funds?

One also has to wonder what sort of risk assessment was made to stress test such bonds, given that no-one was rating them ‘triple A’ or anything like it.

It also doesn’t offer a great deal of hope that mainstream US investors have learned many lessons since they bought up huge amounts of the infinitely more complicated mortgage-based investments that went so badly wrong in the financial crisis.

Of course, the oil price has implications for the oil and gas majors too and their dividend payouts. Such stocks lost their ‘old reliable’ status some time ago.

No less than Neil Woodford saw trouble for oil majors’ dividend strategies although, pointedly, he says he saw trouble when prices were much higher.

Advisers shouldn’t be complacent, although the whole scenario lends itself to decent active fund management or passive management linked to well-thought-through strategic and tactical asset allocation.

Put decent financial planning on top of that and, providing we don’t see a global financial crisis mark two, your clients should be able to ride out these storms.

It is shame however that other global and domestic investors may be repeating past mistakes.

John Lappin blogs about industry issues at www.themoneydebate.co.uk