Described as a game changer for global markets, the dramatic fall in the price of oil is creating a distinct group of winners and losers.
Global GDP is forecast to expand 0.5 per cent during 2015 and 2016, assuming the price of crude oil remains at between $50-70 a barrel. This is because the lower oil price increases the purchasing power of consumers in importing countries and, at the same time, reduces input costs for companies, making them more profitable and keener to invest.
But experts say different countries will be affected in different ways, with no sector more divided than emerging markets.
According to the Bank of America Merrill Lynch fund manager survey for January, a net 13 per cent of global fund managers were underweight in emerging markets, having been a net 1 per cent overweight in December.
Furthermore, a net 17 per cent of investors said emerging markets was the region they most wanted to underweight over the coming 12 months.
At first glance such a reaction might seem plausible. The continued fall in the price of oil, broad currency weakness and fund outflows have all weighed negatively on the underlying markets.
Given its oil exporter status, it is no surprise that Russia has been one of the emerging markets hit the hardest. Russian equities ended the fourth quarter of 2014 down some 32.9 per cent following a severe decline in the rouble.
Pramerica’s Cathy Hepworth, who manages the Nordea 1 – Emerging Market Blend Bond fund, says at current oil prices Russia’s fiscal balance would deteriorate by some 6 per cent of GDP.
However, while Russia’s woes are attracting the lion share of the headlines, the countries that will be hit the hardest by a sustained period of low oil prices are Nigeria and Venezuela.
According to Axa IM’s Eric Chaney, who sits in the group’s research and investment strategy team, the foreign exchange reserves of both Nigeria and Venezuela would be wiped out. In Venezuela’s case this could pave the way for a sovereign default, he says.
Since Venezuela has the highest share of oil exports in its GDP, at 25 per cent, its real GDP will be hit he hardest. In Russia, oil exports account for 12 per cent of GDP and in Nigeria 14 per cent.
However, one country’s loss is another’s gain and the oil importers are set to reap the rewards of the price falls.
In the same quarter that Russia’s stockmarket was plummeting, Turkey was up 11.6 per cent and South Africa had gained 2.9 per cent.
“Net oil importers stand to reap large terms of trade gains depending on their import needs,” says Hepworth. “This could apply a significant benefit for countries whose external imbalances are so far uncomfortably large.
“For example, Turkey’s and Brazil’s current account balance would improve by 0.5 per cent of GDP if the current level of oil prices was maintained in 2015.”
On the flip side, Russia would see its current account balance worsen by 4.4 per cent if the current oil prices continue, Hepworth says.
Julian Thompson, manager of the Axa Emerging Markets fund, says the fund is significantly underweight in both the energy sector and Russia, meaning it has little exposure to the price falls.
Despite benefiting from the oil price crash Thompson’s fund is also currently underweight South Africa, with no mining exposure. However, within South Africa the portfolio is overweight consumer stocks, which he says are a big beneficiary of the falls.
“Transportation is a high proportion of people’s spending in South Africa, so as these costs fall people will have more disposable income to spend on clothing, food and consumer staples,” he says. One holding in his fund is Clicks, South Africa’s equivalent of Boots, which looks set to benefit from increased spending on personal care products.
UBS’ head of global emerging markets Geoffrey Wong says for countries within Latin America the impact of the oil falls is mixed.
“The impact is basically neutral for Brazil top down, as they are well balanced in terms of population and consumption,” he says. “Chile benefits the most as it imports most of its oil needs.
“As for Columbia, the impact is negative given it is a big oil exporter, while for Mexico it is important for the budget as a large part of their revenues come from oil. However because they always hedge the oil price for the budget the impact should be relatively minimal for the next year or so.”
However, Thompson says not all oil importers will surge on the back of price falls.
“Take South Korea for example,” he says. “The economy remains awful so the oil price falls alone are not enough to get growth going. We prefer to invest in countries with better growth prospects where the oil price will act as a kicker.”
An example of this is India, which is the largest overweight country within Thompson’s fund.
He says: “The main benefit of lower oil prices is that central banks will feel more inclined to cut interest rates, safe in the knowledge that lower oil prices will continue to work through the inflation data for some time to come.
“We have seen this already in the case of India, which surprised the market with an ‘out of meeting’ rate cut earlier this month.”