High oil cost provides investment opportunity

I am in the middle of reading a book from 2008 that predicted – almost – the unrest that we’re now witnessing in the Middle East and North Africa. In hindsight, perhaps many of us aren’t really that surprised at the turn of events – but I, for one, have been completely caught off-guard by the speed at which changes have been happening.

For the fifth week in a row we have witnessed pretty substantial capital outflows from emerging market funds, but for how long will this continue, and what will the impact of the unrest be on developed markets?

European sovereign debt issues still exist, and another round of tougher bank capital rules is also right around the corner (with some recommending that British regulators come down even harder on British banks than what is required from the European authorities.) On top of that, the price of oil has soared, and this alone is having a huge impact on market dynamics.

Neil Dwane, chief investment officer for Europe for RCM, says that you should think of the spike in oil prices like a tax on global activity. “It costs more for all of us to do things when oil prices are high.” Starting during the fourth quarter of last year, investors started exiting emerging markets and putting money back into developed markets. Inflation has been heading up for quite some time now, and markets have been driven by the belief that we should be allocating out of bonds and back into equities, says Dwane.

So if oil is moving higher, where are the opportunities? Dwane recommends looking closer at companies with technology that makes us more efficient, like alternative energy, and says there are a lot of firms that couldn’t compete when oil was at $50 per barrel, but now once again can compete with oil at $100 per barrel. He says that other clear beneficiaries could be the exploration and production companies (like BG Group, Tullow Oil, and Cairn Energy) for the simple reason that if they find oil in the ground, it is more valuable now that oil is at a higher price. Dwane also thinks that if oil prices remain high, policy makers will have to try to offset it. They could either do this through more quantitative easing (QE), or via growth supportive fiscal policies. If QE is big enough, Dwane says that the asset class to benefit the most in the longer term will be equities – as long, of course, as the extra QE doesn’t become inflationary.

The FTSE 100 is up around 56 per cent (yes, fifty-six per cent...) over the past two years. Dwane thinks there is a good chance that the UK market will grow 10-20 per cent this year, with dividend growth being even better than earnings. So lots of opportunities to make money – despite all the fears and worries.

Louisa Bojesen is a co-anchor of CNBC’s European Closing Bell.