With the Greek problem punted into the middle distance, investors have had to find something else to worry about. The price of oil has stepped up to the oche, with the recent price hikes and the Iranian tensions making it the obvious choice for the nail-biters among us.
Previous episodes of elevated oil prices have ended badly, most recently in the summer of 2008. The headlines surrounding the ensuing sell-off centred on Lehman Brothers and the banking crisis but the impact of oil at close to $150 a barrel should not be underestimated.
We recently started taking some profits from the equity rally, particularly in areas that may be adversely affected by high energy costs.
If they rise further from here, we will continue to trim. However, we are doing this at the margins and because we think oil is expensive now, not because we are predicting it will be more expensive tomorrow.
I stress these points, first, because we are up front in telling investors we cannot predict the future and, second, because it has struck me just how much the consensus view is that oil is a one-way upward bet, even from these historically expensive levels. US fund managers seem to love the energy sector now, while I have heard countless “experts” warn of rising prices but precious few, if any, predicting a fall.
In fairness, I can see why. Emerging-market populations are expanding and urbanising, Iran looks increasingly unstable and Americans love burning fuel just as much as printing money. But a few years back, I could see why the US natural gas price was high, too. Then fracking came along and knocked it on to its back-side, where it remains today.
Is the same thing going to happen to oil? Will some left-field development, whether it is political, social or technological, send its price back down to $40 a barrel?
The truth is I do not know, just as I do not know if there will be war in Iran. But I do know that a sharp fall would be a bigger surprise to the consensus than a steep rise. And it is the genuinely unexpected events that have the most dramatic impact – compare the 9/11 shock with the market’s nonchalance towards the well flagged Greek default.
Cheap oil would be a positive shock. If rising oil prices act as a brake on economic growth, the opposite also holds true. You never know how equities will react to any given development but I expect cheap oil would give them a hefty boost. It would not, however, be a positive shock to anyone who had sold all their shares or bet heavily on oil or oil-related stocks as part of a macro-driven view.
So how are we dealing with oil? In much the same way as we were dealing with Greece before its problems were postponed. We are keeping our eye on the long term and investing in assets whose valuation, quality and/or growth potential give us a margin of safety.
We think there are plenty of equities and corporate bonds that fit this description and we have the right managers in place to find them, meanwhile avoiding the speculative junk. Being selective like this gives us comfort if the oil price rises, just as sticking with equities does if it falls.
Simon Evan-Cook is multiasset investment manager at Premier Asset Management