Weekly Investment: Staying safe – yet being tactical
NBAD’s Claude-Henri Chavanon blogs about the latest oil prices updates and the effect of Super Tuesday on markets
Oil prices had a very good week, closing 8-9% firmer over the period, with for instance WTI closing at $32.78. There seems to be some residual hope that some kind of production limitation deal might still be possible, despite the dampening comments from Saudi Arabia’s oil minister, Ali al-Naimi and others. In reality, investors have been much more concerned with the effects of current supply disruptions in Nigeria and northern Iraq, and involving pipeline complications in Turkey, affecting perhaps 800,000-900,000 b/day of production.
For years we have known that the potential sources of oil market disruptions can be many and varied, and possibly serious if they occur at the same time. In our recent Outlook we suggested that further 8-12% price rallies were likely.
Although it could still take some months for oil prices to definitively bottom, this kind of price volatility and market dislocation will help form that bottom. We have suggested trading what we see as a $25-45 range on WTI in the months to follow.
What could pressure oil prices lower from current levels? One factor could be renewed dollar strength, while another could be a realization that perhaps only 10% of U.S. shale production that came on in recent years is now being taken out. Traders should take short-term profits in oil-related investment vehicles with WTI just under $33.
Most developed equity markets closed between 1-2% higher last week, mainly led higher by rallying oil prices. Looking at the big picture - in a real sense polarized between the U.S. on the one hand, and China on the other - our Tactical Allocation Committee (TAA) remains happy to be underweight in global equities, led by an underweight in U.S. equities.
We would refer you to the FT’s John Authers’ ‘Long View’, in this week’s FT Weekend, in which he fully explores one of our favourite subjects i.e. what is actually happening to the rate of underlying earnings on the S&P500, and the increasingly questionable quality of them. For instance, looking at the current P/E, the Bloomberg consensus suggests a multiple of 17.3 x, whereas Mr Authers highlights that after a ‘GAAP’ (generally accepted accounting principles) clean-up, the true P/E could be closer to 21.5 x. We would caution investors against getting tricked back into U.S. equities as a class.
The continuing downward direction of earnings revisions, the U.S. Presidential election, and (paradoxically) the probability that the dollar has yet to peak still suggests lower stock prices and underlines the poor value in US equities as a class.
It is worth standing aside during the U.S. Presidential fightClaude-Henri Chavanon
Next week sees the crucial ‘Super Tuesday’ U.S. primaries to be held in 11 states. Hillary Clinton (who is now not looking such a bad option) is now doing better, but Donald Trump, on the other hand, is continuing to roll with the punches and is bouncing back following the views of Marco Rubio and others expressed last week, together with various accusations made against him. Mr Trump’s gaffes don’t seem to affect him whatsoever. Like others, we will follow the results of next Tuesday closely.
Some ‘bad’ results on Tuesday could have some major adverse short-term consequences for the markets.
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