It is easy to be wise after the event but given the ending of quantitative easing by the US Federal Reserve last year (and therefore no more extra dollars being “printed”) simple economic theory would predict that the price of something no longer in excess supply should rise. And it did! From the end of June 2014 to the end of February this year, the trade-weighted dollar (that is, the value of the US dollar compared against certain major currencies) rose 18.5 per cent – a significant help to those exporting to the US but a headwind for US-based international companies.
Oil price stabilises but for how long?
In contrast, the oil price had fallen precipitously since the middle of last year before finding a trading range of roughly $55 to $60 in recent weeks. We say that this play has many more acts to run: production in the US has not slowed down yet, rising to 9.3 million barrels per day in February, one million more per day than a year ago. A quote from the Paris-based International Energy Agency’s latest monthly Oil Market Report says it all: “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.” In this context, it is notable that US oil storage capacity usage has risen from 48 per cent a year ago to approximately 60 per cent today, according to the US Energy Information Administration.
Japan confounds sceptics
One country that has always been a significant beneficiary of cheaper oil is Japan, which is the third largest importer of crude oil and oil products in the world. It is perhaps no surprise then that the Japanese market has been rising strongly. This rise has been principally the result of the buying of domestic investors rather than foreigners. Following the lead of the Government Pension Investment Fund, which had increased its weighting in Japanese equities to just under 20 per cent at the end of 2014, the Government Employees (also known as Civil Service) Pension Fund also announced that it was increasing its domestic equity investment target from 8 per cent to 25 per cent – the same as the GPIF. Others may well follow suit.
The amount of money involved here is huge and there is no doubt of the government’s desire and determination to change the Japanese economy for the better. Remember that QE in Japan is still happening and at a very significant rate. Other factors in favour of the Japanese market currently are significant company earnings growth forecasts, improved corporate governance due to the implementation of a Stewardship Code similar to the UK’s, and an improving job situation. We are optimistic for the Japanese market but think the yen will likely continue to come under pressure. With this in mind, a yen hedge seems prudent.
Given the quite extraordinary times through which we are currently living, patience definitely seems to us like a virtue. We continue to believe that well-selected equities can offer investors a reasonable risk-return proposition over the medium term, particularly compared to cash and developed market government bonds, and that talented fund managers continue to have the potential to outperform. The market will not necessarily come around to one’s way of thinking overnight, though, which is why we consider patience to be one of the most important traits for any investor.
John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management