Probably the most dramatic move during November has been the continuing, and indeed accelerating, fall in the price of oil. There exists, in the oil market, a substantial degree of over-supply and with new reserves coming on stream in the USA, the power of OPEC to dictate production and prices has dramatically slipped away and it looks as though the OPEC cartel has lost much of its grip for at the very least some long time to come. All sorts of consequences flow form this so that while the cash rich OPEC countries can stand lower oil prices, countries such as Russia and Venezuela suffer considerably. On the other hand, large importers of oil, such as Japan and much of Europe will find that consumers benefit. As for the USA, the economy is now becoming very much less dependent on imported oil and if fracking continues at pace the US may shortly become a net exporter.
What is also clear form the lower oil price is that, if it is maintained, more marginal producers, including some parts of the US oil industry, will be subject to a severe squeeze on profitability. This may in turn rebalance the oil supply and demand equation over time but we do not believe that it takes away from the fundamental shift in the balance that has been taking place in recent years.
Similar falls have been occurring in the prices of many other industrial raw materials which will also help to bring general prices down. The combined impact produces the potential for deflation which can be just as damaging, or indeed more damaging, than can high levels of inflation. It is our view that deflation led by commodity price falls is, within reason, beneficial provided that general demand does not collapse. Our view is that, in order to avoid this, interest rates generally will stay lower for even longer than recently anticipated, supporting the value of fixed interest investments and further weakening the already limited attractions of holding cash.
The impact of all of this on equities will be mixed. We have recently seen substantial falls in the value of shares of oil and mineral producing companies, of those involved in exploration and of those involved in the supply of, for example, oil field services. While such companies represent a significant portion of the FTSE 100 share index, there are large swathes of industry and commerce, in the UK and elsewhere, that stand to gain from lower raw material prices, as do consumers. This is clearly potentially bullish for equity investors and at this juncture reinforces our generally overweight equity stance.
Meanwhile, in the UK, the Chancellor’s Autumn Statement delivered no major surprises – growth and unemployment trends remain encouraging but deficit and debt reductions remain stubbornly difficult to achieve. There are, however, a number of points of detail which will become relevant to many investors and in due course we will comment on them as appropriate.