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Brian Tora: Is the market pricing in future risks properly?


With the general election campaign now in full swing, our domestic market is displaying the sort of nervousness that might be expected when the final outcome is so uncertain. Building a base above 7,000 for the FTSE 100 is now looking a tough challenge.

While the success or otherwise of the majority of those companies that go to make up our principal benchmark index is hardly dependent on who is entitled to lean nonchalantly on the doorframe of Number 10, you cannot blame investors for taking to the hills when the composition and policies of the new government are so obscure.

Personally, I am already suffering from campaign fatigue. But trawling through reports on markets and financial issues likely to impinge upon the success or otherwise of investment strategies is most definitely on the agenda.

I read an interesting policy brief recently entitled “The End of Expensive Oil?” penned by a leading American academic whose speciality is studying commodity prices. Like many similar papers with what amounts to an economic bent, the conclusions were hedged somewhat, but nonetheless compelling.

From his ivory tower in Stanford, California, the learned professor opined that shale oil and gas (particularly gas) was changing consumption patterns in the US and inevitably driving the world’s largest economy towards energy self-sufficiency. Indeed, China has now overtaken the US as the world’s largest importer of oil but even here the picture was changing. Fuelled by a desire to reduce dependency on coal, China is developing its own shale deposits.

Then there is Saudi Arabia. While the perception exists that the Saudis refusal to cut production in the face of an oversupply of oil is just to make shale production uneconomic and to punish other higher cost producers, perhaps it is more that it simply does not see other producers following suit. Many OPEC members face their own set of economic challenges, which will hardly be helped by reducing the revenue flows from their principal export.

The only way Opec might successfully engineer a higher oil price is for them all to act in concert. But demand from their two largest markets is in decline, making such a move unlikely. So it could well be that a return to price levels above $100 a barrel will not occur anytime soon. It may well be that $50 becomes something of a floor for the price but changing demand, alternative sources and new technologies could combine to limit any rise above current levels.

Of course, the appreciation of the dollar has mitigated the price fall for some producers, but perhaps we should be factoring in lower fuel and energy costs for the future. Overall this should be a positive influence on economic development. Lower prices leaves more money in the pockets of consumers. These are, after all, a prime driving force for growth, particularly in the developed world. And we need some good news right now.

The fly in the ointment remains the increasingly unstable nature of the Middle East, in which much of the cheaper sources of oil resides. Saudi Arabia’s involvement in the Yemen, the ongoing Syrian conflict and a lack of resolution to the issue of Islamic State, not to mention the messy situation that has developed in Libya, combine to make the future look distinctly tricky.

Add to that the possibility of a left leaning minority government in Westminster and I start to wonder whether the market is pricing future risks adequately. May is but a month away and we all know the old adage. I wonder if staying the course until the daffodils have stopped flowering will work this time around, though.  

Brian Tora is an associate with investment managers, JM Finn & Co.


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