Thoughts and Observations


I am writing slightly later due to the recent half term break, and because I wanted more time to think through our strategy for this year.

We have certainly had a bumpy start, and so for now the pilot has turned on the fasten seat belt sign, because the bumps we have had so far, look like being with us for a little longer.

At first the main culprits were thought to be the continued China slowdown, and the US December rate hike, signalling an end to the ‘free money bonanza’ markets have gorged on.

But something else had reached a tipping point, the low price of oil.

When oil falls below a certain level it re-orders world problems and this lays out the foundations of how we should put together our risk management plan for 2016.

In fact markets and oil have become so interlinked, that when oil has a good day markets go up, and when oil has a bad day markets go down. All it takes is some stray comment from a Saudi, OPEC or Iranian official and that can dictate how our stock market performs.

That’s why we have not simply bought on the dip, this is a little different.

Oil talk is trouncing fundamentals at this time, and whilst there is no shortage of other things to consider, right now, oil is the main thing.

Some Background

Normally when markets fall a bit this means we might dip in and buy things at a lower bargain level for the future, and this has worked well in the past. But something stopped me, and that was the markets correlation to the price of oil.

So the reason for not rushing in straight away is that if we now look at oil as the main driver of markets this year, and if we follow this through, then this causes the potential for further volatility and market drops, beyond what we have already seen. Oil is controlled by OPEC/the Saudi’s and they have been in unofficial dispute with the USA.

OPEC have chosen the route of short term self-harm, to put the US Fracking industry out of business. They’ve been very upset that the US has become self-sufficient and their stranglehold has been weakened.

If you think about it OPEC can easily make the price of oil go up, all they have to do is say that they are reducing production, reduce the glut, and the price goes up.

In response to OPEC, the US lifted sanctions on Iran to export oil, which has upset OPEC even more.

In addition, the low price of oil has forced sovereign wealth funds to sell shares, as what they get from oil has decreased.

But about a week ago it looked like the Saudi’s and OPEC had had enough, they announced a freeze on current levels of production, and since then oil and markets have improved from their mid-February lows.

Just that one comment is what’s caused the recent rally, in oil and stocks, and some stats from the US which said the US was still ok and avoiding recession for now.

Fear of Brexit is also having a definite effect on Sterling with Capital Economics predicting further falls from 1.40 to 1.20 on a Brexit, effectively devaluing our currency. Mark Carney is at a meeting of the G20 today and has indicated the BOE could cut rates if needed, because of the ‘low growth, low inflation, low interest rate equilibrium’.

So aside from China, US interest rate hikes and Brexit issues, oil has been at the heart of recent problems but still has the potential to cause more issues later this year. Whilst the US is still the critical driver for the rest of the world, and should minimise damage if it avoids a slowdown, if Iran decides to go it alone and pump more oil into an already oversupplied system, oil could fall to US$ 20 per barrel. That would cause considerable upset to world stock markets, at a time when a report released today reveals that 2015 was the worst year for world trade since the aftermath of the financial crisis.


What markets need is for the Fed to ease off a little on further interest rate hikes, for Europe to stimulate a little, but mostly it needs OPEC to calm nerves and work towards an output cut. This would lead to the price of oil increasing and markets doing better off the back of this.

We already have some defensives built up in portfolios due to the concerns with China last year and so this has worked well. In portfolio reviews this year values have held up very well because of this.

The choices we have are to take more risk, and buy cheaply for the long term with the risk that things could get worse before they get better, so you would need a good nerve for that.

Or that we already have some great equity positions, and that we could use spare cash to bolster the defensive side.

My thinking is mainly the latter. That way if we expect the best we will still be ok and by preparing for the worst, we will be better off than everyone else. It also leaves us some ammunition to drip feed at a lower point than today, if things did get worse.

Recession fears have been overdone in the US and this has caused the Fed to stay on track with their rate rise assumptions this year, although I do think the next rate rise will be delayed to mid-year. Employment and the general economy are good and whilst US earnings are down, it’s not all bad, but we are not out of the woods, it’s more that current events have not caused too much damage yet.

To a degree markets have lost confidence in central banks to manage rate rises in the US as there is such a divergence in views between the market and the Fed. Also, the new QE weapon of choice ‘negative interest rates’ appears not to be working as well as expected. Carney may well cut rates if things were to get worse.

So for now it’s more a case of fastening our safety belts. All this will pass in time, but in the interim my thoughts lean more to bolstering defences just in case the oil situation worsens later this year, or we have a resurgence in US slow down fears.

About Austyn

Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in both 2010 and 2013.

Following his work on risk reduction strategies, in 2011 he was recognized by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’

Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.

With over 25 years wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.

Research Sources: Bloomberg, Financial Times, Wall Street Journal, John Authers, Robert Schiller.