In response to the current flurry of activity on World stock markets, I think it’s important to put a bit of perspective onto why this is happening and also to forecast what’s likely to be the outcomes.
One of our huge advantages at FSC Investment Services is that unlike most of our competitors we do not outsource the management of our research to third party organisations. We have our own internal team headed up by Anthony Coyle ( Anthony is hugely experienced having spent many years with Torquil Clarke before joining FSC three years ago). Anthony and his three assistants trawl the information highway, they talk to fund groups, we have regular meetings (beauty parades) with fund managers, the sole purpose of this is that we get the right knowledge first hand, we also have the opportunity to look them in the eyes and get to ask the awkward questions that he’ll us to sort the fact from the fiction.
It is this depth of research, the deep tissue examination that the team perform, allows us to closely examine the driving factors which are the catalysts for making the markets move.
For all the above reasons we are not panicking about the falls and volatility currently hurting the markets. What we are enduring isn’t a true ‘bear market’ in the truest sense of what a bear market is ( a bear market is one where stock values drop by over 20%, driven by sell offs caused by excessive market recession).
What we’re seeing is a fully fledged ‘ technical correction’ ( a technical correction is where a market sees shares sold as a by product of an action or a reaction to an event or specific situation).
In this respect we need to roll back the clocks 18-24 months. Vladimir Putin was hell bent on building his oil and gas line through the Ukraine, the purpose of the line was to provide Russia with a cheap way to get Russian gas and oil onto the World markets much more efficiently and obviously cheaper.
With the product of cheap Russian oil and gas flooding world markets, Mr Obama went to visit the OPEC heads of state, these are the people who determine the flow and ultimately the cost of oil and gas from the Middle East. The situation was discussed, the prospect of Putin flooding the World with cheep gas and oil for years to come, and the threat of military intervention perhaps being necessary to prevent him from building this pipe line was not so attractive proposition. The alternative was to open the valves and flood the markets with cheap gas and oil, make the price so low that Russia would have no commercial benefit in building the pipe line. And that’s exactly what they’ve done.
Now, for every action in life there’s a knock on effect. The effect of these oil prices dropping from July 2014 values of $118 a barrel to the current $27 a barrel is that Putin can’t sell his oil that cheaply so it’s cash strapped Russia immensely. Russia is being financially crippled by these low prices.
The knock on is that Russia ‘used’ to spend fortunes with the other communist super power in the World “CHINA”. So the next thing we see is China is becoming short on money, they have a massive multi Trillion Dollar infrastructure rebuilding program underway in China, new airports, new rail and road networks, telecommunications and Internet connectivity, it’s all going on in China!
Without Russia spending money in China the rate of expansion has had to slow down now to a current 6.9% per annum growth, this has prompted the Chinese government to tighten their fiscal policies, they have introduced a form of quant active easing so they are far from being in trouble. It’s a slow down in growth, not a recession.
So where does this leave us?
Right now, we’re seeing volatility in huge swings as the markets are scared of potential ‘bad news’, unfortunately they’re behaving like scared deer, the least rustle of the wind and they flee the scene. In reality the situation is quite different. The fact is that the FTSE 100 is heavily loaded with massive companies like Shell oil , BP, Eon, Scottish and Southern Electric, the big Gas and oil companies and the mineral and raw goods suppliers. So it should be no great surprise that these guys are getting hammered because of the low oil prices. The knock on is that all the rest of the market is doing very well!!!! Low transportation costs, lower heating and air conditioning costs, lower raw materials costs etc… They all help the smaller business in the long run.
I foresee that a recovery will not be too far away, but unlike in previous recoveries it’s not going to be led by the FTSE Giants. It’s going to be a floor up recovery, all these smaller companies the AIM 350 type firms are shortly going to be turning these lower running costs into profits, bigger profits than they have been used to for a long time.
The catalyst for the bigger overall markets to recover is unfortunately going to be oil supply and the value of oil in the open markets, we are drowning in surplus oil right now, a really cold hard winter would have helped use up these surpluses, but we’re having a mild winter, so the use of this surplus is taking longer than expected. But if OPEC and the USA and funnily enough Iran get their heads together and slow down current production then prices must rise. I for see a critical yield price ( the price where the oil sells for greater than its production cost) as being somewhere about $44-45 a barrel. It won’t be a case of waiting for the price to hit this level before the recovery begins, I think a few moderate rises in oil price which sends sentiment up on price rather than down is all that will be needed.
So what should you do.
If you have investments in the market and the values will almost certainly have dropped – do nothing, you don’t need to values normally recover in a reasonable amount of time.
If you are selling units in a fund to provide an income – if you can afford it, stop them or reduce them so you’re not selling lots of units at a low price to fund your income. It can always be restarted or in creased later.
If you have money in Banks or Building societies or ISA accounts, now really is an absolutely brilliant time to think about investing in a proper daily managed portfolio fund. You’re buying at a terrific discount. Don’t go mad, bleed your investment in using staged payments, so you can invest as the markets slowly improve.
You should undoubtedly have a superb opportunity to see this investment grow as markets recover.
Remember the adage ” buy low- sell high” and know when to stay where you are.
Not knowing what or how to buy is where our years of experience and expertise will pay huge dividends, we will assist you through the whole process. It’s not difficult and it’s not expensive, it’s value for money. We will put you in the right place at the right time all the time.
Hargreaves Lansdown have just announce that they have seen a 17% increase in new investments, we are seeing a similar trend. So folks are at last realising that investing in the ‘real’ markets with a bit of solid guidance is the way to go.
For help or just to chat through your thoughts please give us a call on 01902 422333