But, with the price of Brent crude bouncing slightly off five year-lows of $65.29 to close the day on Tuesday above $66 a barrel, there are other elements of the market where lower prices are proving a significant windfall.
David Jane, manager of Miton’s multi asset funds, said, while it is, as yet, unclear whether or not the falling oil price will be a net positive or a net negative for the US economy, certain energy intensive areas of the market, such as airlines and cruise ships, have been clear winners.
Looking further out, however, he said, there could well be other beneficiaries.
“Cheaper oil will naturally lead to more money in the pockets of consumers and this effect is particularly strong for the lower income groups who have a higher propensity to spend. This may well further enhance the long awaited improvements in real incomes and lead to higher consumer spending, moving the economy onto a sustainable growth path. For this reason we are revisiting our consumer exposure.
Steve Davies, co-manager of the Jupiter UK Growth Fund agrees that ower fuel prices should provide a general boost to UK consumer spending and added that the disinflationary impact could also delay the first interest rate rise.
“These factors should help some of our UK domestic holdings, for example Dixons Carphone and ITV,” he said.
He added: “More directly, IAG and Thomas Cook should experience significant reductions in their fuel bills over the next couple of years and we have been adding to both positions in recent months.
One area Davies still doesn’t like however, are the UK oil majors, which he believes have not yet reached the ‘recovery’ phase.
“When it comes to recovery opportunities, our antennae start twitching when we see a fair degree of distress combined with potential for substantial upside to our target price (in excess of 35% given the opportunities currently available elsewhere). Yet BP and Shell are only down 10 15% from their summer peaks and it is probably fair that we assume that this is about all they would recoup in the unlikely event that the oil price quickly shot back up towards $100.”
And, he added: “Why have they not fallen further, given that earnings forecasts for 2015 could end up 30%-40% lower than 2014 if $70 oil persists throughout the year? The simple answer is that they are backstopped by dividend yields of 5.5% to 6%, based on the current share price. With a yield at that level we would only expect to see valuations become really distressed if investors started to think that the dividends were under threat.That may happen eventually, but it would take time to unfold.”
Another set of beneficiaries over the medium term, according to Jane, are those economies that import a lot of oil, particularly, Japan and Germany.
“We have been well positioned for the recent moves but are now considering the next order of effect on our sector and regional allocation as we go into 2015. We have limited exposure to emerging markets and a strong position in Japanese consumer cyclical stocks. Lastly, our bonds have been benefiting from the deflationary effects of falling oil prices,” Jane said.
Frontier Markets
However, he added, that within many of the South East Asian economies, which are both consumers and producers of oil, the effect is less clear.
Since June, the MSCI Frontier Markets Index is down almost 8% in US dollar terms, while the MSCI Emerging Markets Index is 5.5% lower and the MSCI World Index is flat. Michael Levy manager of the Baring Frontier Markets Fund, believes this sharp fall in frontier markets has been excessive, primarily because of the significant differences seen among countries within the index.
“Many frontier market countries are net oil importers, for example, and their economies should benefit from the oil price fall. With lower fuel costs and a stronger economic environment, we particularly like Sri Lanka, Bangladesh and Kenya,” he said.
And, he added, “Net oil exporters face some near-term challenges. Even here, however, fuel subsidies in Nigeria, for example, could mean that input prices move lower, raising profits for well-placed companies.
