Increased volatility as a result of uncertainty about oil prices is something that should have active stock pickers gleeful.
“There are country, region and stock level opportunities,” said Tapan Datta, head of asset allocation at Aon Hewitt in London. However, there will be pitfalls.
Net oil importers in the emerging markets, such as Turkey, Indonesia and India, will benefit, said money managers, consulting and pension fund executives. But other developing markets will lose out.
“There are a number of countries around the world that are dependent on oil (exports) for political and economic stability: Russia, Venezuela, parts of Africa for example,” said Matthew Tillett, London-based portfolio manager at Allianz Global Investors. “Hits to the oil price could well have knock-on effects to other countries around the world. So it is something that we need to look at on a stock-specific basis.”
Investment in oil and oil-related companies will depend on an investor's view of how sustainable low prices are. Companies that explore for and produce oil, those that provide services to the industry and others where some aspect of business is related to oil — such as engineering, testing and measurement — are clearly at risk, said Mr. Tillett. AGI executives expect a combination of lower supply growth and continued demand growth to cause the price of oil to rise significantly from the current level over the next two to three years. “On this basis, there is an argument that some of those companies associated with oil will look quite attractive as investments given current share prices,” said Mr. Tillett.
For investors, it is also important to understand the relationships within the energy sector itself. “The drop in Brent crude oil has been about 10% worse than the drop in heating oil, and almost 20% worse than natural gas,” said Jodie Gunzberg, New York-based global head of commodities at S&P Dow Jones Indices. “Unleaded gasoline companies, as refined-product sellers, have some control of how much of the oil drop to pass to the consumer, making it potentially profitable for some period of time, creating an investment opportunity.”
And Tim Edwards, London-based director, index investment strategy at S&P Dow Jones Indices, said there are even less-specific opportunities. “I see and hear that this is not so much about stock picking, but asset classes, with multiasset dispersion ticking up (and) choices between countries, commodities and bonds, and emerging markets and developed markets equities.”
Over the next year, the key for portfolio managers will be tilting toward the winners and away from the losers. Among the winners will be “consumer discretionary stocks in the U.S. — asset classes where the consumer wins,” said Alastair Baker, London-based fund manager for multiasset investments at Schroders PLC. “The bill for companies importing oil will fall.”
Infrastructure also was cited as a winning asset class due to the volatility in oil prices, and linked to that, alternative sources of energy, which “have been on the radar for some time, but many investors too often have viewed instruments of this type solely to meet environmental remits,” said Matt LeBlanc, New York-based chief investment officer of Organization for Economic Cooperation and Development infrastructure equity investments, at J.P. Morgan Asset Management. “Even with the current energy market volatility, investments in select clean energy operating facilities can generate consistent and growing investment yields when supported by long-term contracts with creditworthy counterparties.”