As a Canadian, it’s easy to forget that the oil slump has been a boon for other countries.
Far from being a uniform depressant, cheap crude is a powerful stimulant for global consumption and liquidity, says Tyler Mordy, president and CIO of Forstrong Global.
With the world burning 34 billion barrels of oil each year, Mordy says the US$70 price fall since August 2014 will redistribute more than US$2 trillion annually to oil consumers. “To put that in perspective, that’s a bigger income boost than the combined U.S. and Chinese fiscal stimulus in 2009,” he says.
Despite that good news, “People are interpreting the decline in oil prices as a leading indicator of weakness in global demand, even though it’s much more of an oversupply story,” he says. And that sentiment is unfairly spilling over to equities. “The correlations between oil prices and the U.S. stock market [are] the highest they’ve been in years, and that doesn’t make any sense.” Fortunately, he says, is those correlations are now diverging.
The biggest beneficiaries of cheap oil are emerging markets, despite their fall from grace over the last few years. “People hate emerging markets, but we think there’s a huge opportunity because things have been indiscriminately sold off.”
So deal hunters will be rewarded. “We’re morphing from that China[-dominant] era where you can just buy a broad-based EM ETF, to an era when country selection really matters.”
In Asia, he likes India, which imports 100% of its oil, but avoids oil-exporting Russia. He also likes the dim sum (renminbi-denominated) bond market, which he accesses via the ETF DSUM; the Chinese A-Share market, which he accesses via ASHR; and Vietnam, which he accesses via VNM.
In Europe, he likes Poland (via EPOL). “It’s part of the EU, but it still has its own currency, which has been absolutely annihilated.” Poland is also a manufacturing hub and borders Germany. So, much like how U.S. companies have turned to Mexico, European multinationals have started outsourcing to Poland due to cheaper costs and labour.
As for frontier markets, Mordy advocates a broader approach; “those should be viewed as longer-running investments.”
The environmental angle
Mordy’s partly bearish on oil because of the global movement away from fossil fuels. He points out renewables have largely attracted mainstream investment when they were cheaper than oil – until now.
“This is the first time you’ve had a good commodity bear market and the environmental cohort has still persisted,” he says. “We’re actually reasonably positive on a number of alternative energies.” He favours solar, in part because the Chinese government is subsidizing it in an effort to reduce air pollution.