Report on Q1 2015

Report on Q1 2015

30 Mar 2015

In Q1 the FTSE 100 rose by 3.3% and the FTSE 250 by 6.4%. The FTSE 250 is probably more sensitive to the domestic economy (or at least to how investors are feeling about it). The FTSE 100 has larger more global businesses including, of course, oil companies and banks, which received another kicking in the recent budget. That last point is a salutary reminder that investors will have to judge political risk in Q2 as the general election arrives 7th May (though the formation of a government may take weeks if the polls are correct in suggesting that no party will win a majority). I strongly doubt whether the economic outlook will be materially changed regardless of who wins. There is very little room for manoeuvre and it is painful to watch politicians trying to pretend otherwise. But where the banks have been led others could follow, particularly if the next government includes Labour. Utility companies have already been singled out to be sacrificed to the mob. No politician appears to understand that electricity supply is a very long-term and expensive commitment. It may be true that utilities are greedy cash cows but they will not invest the vast sums needed in next generation energy supply if they are treated like political footballs. Labour also wants to limit the profits available to companies who provide services to the NHS. I have no idea what they mean by this (drug companies? nursing agencies? hospital retail concessions?) but I am pretty sure that they don’t either. The point to bear in mind that stupidity is no bar to persecuting businesses that can be successfully vilified. Gilts had a relatively quiet quarter with yields falling from 1.72% to 1.57%. Last week I took profits on 25% of my gilt holdings. This was a small insurance against the political scene, but looking across the sea and seeing Irish 10 year bonds yielding 0.76% it is clear that most of us are missing something. Core eurozone bonds i.e. those of Germany saw 10 year yields fall from 0.54% to 0.18% and as I write the seven year German bonds have a negative yield. ECB QE now looks even...

OIL…….Something Happened

OIL…….Something Happened

7 Jan 2015

The recent sharp fall in the price of crude oil is one of those rare financial events whose importance is appropriately reflected in press headlines.  Oil has a strong claim to be the world’s most important commodity and also the most political. OPEC was founded in 1960 by the charming quintet of Iraq, Iran, Saudi Arabia, Kuwait and Venezuela. According to its website: “OPEC’s objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” Were these companies rather than sovereign nations, this would be an illegal price rigging cartel subject to enough lawsuits to employ every lawyer until the end of time. As it is, it’s a legal price rigging cartel that everyone else has to live with if they wish to continue consuming oil. In 1973, OPEC became explicitly political when the US supported Israel in the Arab-Israeli war. It banned exports to the US and the barrel price of crude quadrupled from $3 to $12. It was a shocking inflationary impact that the world did not need. The Iranian revolution in 1979 saw a further leap from $14 to $40. The next great move came in the 21st century as global economic growth was propelled by developing countries such as China and India that became huge importers of oil. The price touched $140 until the financial crisis torpedoed the world economy in 2008 and the price fell right back to the 1979 price of $40. It is worth making a couple of points here. One is that the oil price has shown itself to be very volatile with changes in marginal demand having a huge impact. The other is that, partly thanks to OPEC, the market’s opinion of whether oil is cheap or expensive has largely relied on referencing its own history – the most unsophisticated way of valuing anything. That having been said, it is obvious that oil over $100 makes costly oil supply viable, notably from Canadian oil sands but also from fracking. The world...