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Spring Investment Monitor - March 2015



    At a time when the eurozone has been struggling to post any notable growth, the slump in the price of the commodity has boosted the region’s fortunes, being as it is an importer of oil.

    For many regions, this trend has had a significantly negative impact, though – and the question remains, how low can oil go?

    Within the emerging markets, Thailand, Turkey, South Africa, India and China are the main beneficiaries of weak oil as they are the largest oil importers, according to Nathan Griffiths, senior portfolio manager in emerging market equities at ING Investment Management.

    He explains: “As most oil-importing countries have operated in recent years with sizable current account deficits, improvements here will increase their macro stability. The more stable a country’s external financing position, the more cheaply it can attract foreign capital and lower inflation.”

    He adds: “At the other end of the spectrum is Russia, the United Arab Emirates (UAE), Colombia and Malaysia, all sizeable oil producers and net exporters.

    “Russia is facing especially serious consequences from the collapse in the oil price. The country generates approximately $430bn (£282.1bn) of oil export revenues. In 2013, this accounted for 16 per cent of GDP.

    “To offset the decline in oil revenues, the country has allowed the ruble to fall sharply and this is having a significant negative impact on the economy.”

    For Oliver Leyland, senior investment analyst, Latin America and emerging markets at Hermes Investment Management, the slide in the oil price is different this time around.

    “What markets have experienced over the past year, and which has accelerated since the OPEC meeting in late November 2014, is a supply-side shock as chief oil price-setter Saudi Arabia prioritises market share over price,” he says.

    “This differs materially from 2008, when collapsing global growth sank demand. Meanwhile, the drivers of the dollar’s strength are more nuanced, though to some extent caused by the economic weakness of the eurozone and Japan rather than emerging markets.”

    Mr Leyland observes that emerging market countries are also less leveraged to oil prices now, pointing out that the energy sector accounted for 18 per cent of the MSCI Emerging Markets index in 2007, compared to 8 per cent today.

    “Given these developments, we believe that the likelihood of emerging markets being broadly hit by a balance-of-payments shock is lower than when oil has fallen and the dollar surged in past cycles,” he says.

    He warns, however: “We do not deny the potential for pockets of stress in mismanaged emerging economies that have become too reliant on energy exports, such as Russia, Venezuela and Nigeria.”

    Closer to home, Europe seems likely to benefit from the falling commodity price at a much-needed time. Legal & General Investment Management economist Hetal Mehta sees an improving near-term growth story for the eurozone.

    She says: “There are a number of positive factors at the moment for Europe – not least, as net importers of energy, that lower oil prices should provide a boost to incomes and drag inflation lower. Cheaper oil prices should feed through to higher disposable incomes, which can either be saved or spent.

    “On the flip side, however, the fall in inflation expectations is a worrisome development and could presage a self-fulfilling slide into deflation.”

    While the slump in the price of oil may not be the answer to Europe’s woes, it is providing a helping hand at a time when the region could do with some positive news.

    Finally, the most noticeable impact in the UK is at the petrol pumps, which may feed through into other areas of the economy.

    Martin Walker, fund manager at Invesco Perpetual, notes: “So often in the past, consumers have had to adjust their belts in response to rising oil prices. However, the sudden and quite dramatic decline in the oil price since last summer has presented your average UK consumer with a rather more welcome type of adjustment.”

    He confirms that petrol prices in the UK have fallen by roughly 17 per cent since June last year.

    Mr Walker is sceptical about how long this “unexpected boost from an old enemy” will continue. “Whether this boost to the economy lasts in the medium term looks unlikely, I would say – the reason being I believe oil prices are now more likely to rise from here than fall over the next few years,” he says.

    Ellie Duncan is deputy features editor at Investment Adviser

    In this special report


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    1. How much does Russia generate in oil export revenues?

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    4. Growth in the eurozone reached a seven-month high in February, with the latest PMI data reading at what number?

    5. According to F&C’s research 51 per cent of UK financial advisers believe more than what percentage of their clients who would have purchased an annuity have deferred that decision?

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