Rising financial markets continued the rebound from September and October lows into November, with global stock and bond markets registering gains. However, looking under the surface we can see that there were some big winners and losers.
Markets have been overly fearful to anything that might signal the global recovery falling off track. Investors were concerned about the weakness in continental European economies, which still continues. However, the European Central Bank has announced more support to stimulate economic growth, including an increased bond buying programme.
The news that has really made investors nervous has been the collapse in the oil price, down about 40% since mid-June. Such falls normally mean that oil demand has collapsed and that there are much deeper problems with the global recovery.
Should we worry about falling oil prices?
We don’t like to use the phrase ‘this time is different’ but there is a lot of evidence to support a big change in energy markets, meaning that the drop in oil prices might not be such a bad thing.
Oil markets have suddenly become overwhelmed by lots of new supply as output resumes in Libya, Iraq and Iran and is accelerating in the US. Because of shale drilling, the US is on course to overtake Saudi Arabia and then Russia to become the world’s largest producer next year – doubling its output in just six years.
The key swing producer with the strongest influence on oil prices, Saudi Arabia, has not yet turned off the taps to balance supply and demand.
The fall in oil prices could potentially have quite a big impact on portfolios. In November we saw that the effect was quite different across various countries and assets. For instance, Norwegian stocks lost 8% and the UK market – with lots of oil companies – lagged the rebound in the rest of Europe. Big oil importers like Japan will benefit.
For the world economy overall, a falling oil price acts very much like a tax cut. And for that reason, the outlook for 2015 growth has got a lot better. In the US for example, we estimate that the drop in energy prices will give households a 1% boost in their spending power – which is pretty significant.
Lower oil prices will also push inflation lower, keeping borrowing costs low. Good news for mortgage holders, but perhaps less so for savers.
What changes have we made to portfolios?
Actually, very little. We thought it was prudent to ride out the market decline and we’ve seen good recovery. Though some of our favourite markets have had a very tough year, losing money through to October, the rebound has been strong. In November, Japan and Germany gained 6% and 7% respectively, which is very encouraging.
Overall, 2014 has been a mixed year in the markets, which has made it a tough year for investing. In the UK we expect GDP to grow by 3% over the year, with 2.3% forecast for 2015, as announced by the Chancellor in his autumn statement this week. There’s also a raft of other changes proposed to help small and medium UK businesses thrive, which is certainly welcome news.
On behalf of Nutmeg, I’d like to wish all of our customers a very Merry Christmas, and a prosperous 2015.
About this update: This update was filmed in December 2014 and covers figures for the full month of November unless otherwise stated. Data sources: Bloomberg and Macrobond.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
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Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port