Saturday, 18 October 2014

Long-term investors: Time to Fill up the Tank with Energy Exposure

To read the article on Stockopedia, click on the link below: 

Yes I know, the Oil & Gas sector has been a horrible place to be, really since mid-year. Trust me, my portfolios have suffered thanks to a sizable exposure to this sector.

But I believe that there are good reasons for expecting the oil price to rise, lifting the oil & gas sector with it:

  1. There is an OPEC meeting on November 26, and with Saudi Arabia as the official swing producer not wanting to be the only country to cut production, is turning up the heat on other OPEC nations to participate in coordinated cuts. Bear in mind that OPEC are producing a lot more crude today than in previous months/years thanks to recovery in Iraq crude production to near to 3m barrels/day, and more recently Libya which has raised production from very little to 750,000 barrels/day over the last 2 months. But no other OPEC producers, who had increased production originally to cover the Iraq + Libya shortfalls, have cut back meaningfully - yet.
  2. US oil refineries have been running at lower capacity rates as is normal for this time of year, of the order of 84% vs. 92% previously, as they go offline for scheduled maintenance. So as they come back online, US demand for crude should pick up again, helping to correct the unusual contango situation (where spot crude is cheaper than dated futures, whereas normally it is the other way around).
  3. Global demand for energy will continue to grow, most notably from emerging markets as they start to catch up with Western-style energy-consuming habits, and if anything, lower crude prices will encourage greater consumption, with a lag...
  4. There is still a risk of a cold winter hitting Northern Europe and the Northern part of the US - Siberia is seeing lots of snow, there is even snow already in Moscow! This often presages a hard winter in the North of the US, which would mean more oil and gas consumption for heating. 

Even with a small bounce today in Brent crude oil price to $86/barrel, it is still a very far cry from the $115/barrel touched back in mid-year. I would not expect necessarily to get back to these heady levels, but I would not be surprised at all the see Brent back above $90/barrel sooner rather than later. 

Wishful thinking, perhaps. But we shall see... In the meantime, I am increasing my holdings in a number of junior oil companies with exposure to US shale such as Caza Oil & Gas Inc (LON:CAZA), and also increasing my holdings in oil- and gas-focused ETFs in the US. 


Wednesday, 15 October 2014

VIDEO: Sky Business News Appearance on Global Stock Market Slump

This evenng (Wednesday), I spoke to Ian King about the scale and reasons for the current stock market slump. I also touched on why Initial Public Offerings are being pulled, the latest withdrawn IPO issue being Aldermore (the challenger bank). 

Click on the web link below to view this short video:

Friday, 10 October 2014

Today's CNBC TV Worldwide Exchange appearance: Discussing the return of volatility (VIDEO)

Good morning,

This morning I appeared on CNBC TV’s Worldwide Exchange programme, broadcast to Europe, US and Asia.
Here in this short video clip, I discuss some reasons for the return of volatility to financial markets.

Have a look!

Tuesday, 7 October 2014

‘Tis The Stock Market Season to be Jolly

“Be greedy when others are fearful” 

This quote from one of the most famous investors of our age, Warren Buffett, is one to remember when confronted by a sharp sell-off of the sort that we have witnessed over the last four weeks. 

Challenging a 14-year High

In early September, the FTSE 100 index stood a fraction below the 7000 level, finally a hair’s breadth away from setting a new all-time high (the current all-time high is 6950, set back in late 2000). 

Now here we are in early October, braving the onset of Autumn and cooler temperatures, with stock markets globally also seemingly affected by a similar cooling. The FTSE 100 is now sitting around 6500, roughly 7% lower than a month ago. 

This sharp reversal, triggered by fears over weakening global growth and with the prospect of the US Federal Reserve raising interest rates on the other side of the Pond, has investors scurrying for the relative safety of bonds. According to the Investment Company Institute (, US retail investors have taken a net $2.6 billion out of stock funds and put over $4 billion into bond funds in the month of September. 

Don’t follow the herd and stampede out of shares

Rather than follow this herd, which has typically been late to invest in stock market uptrends and also late to exit stock markets one they have already fallen far, my contrarian instincts tells me to buy into the stock market now, on the basis that one should always be aiming to “buy low and sell high”. 

Several stock market sectors such as Oil & Gas and Food Retail have already suffered heavy falls and are now beginning to rebound. Valuation is relatively attractive too, with the FTSE 100 trading at a 12.5x P/E and paying out a dividend yield only a whisker under 4%. That’s not far off twice the paltry return that you will get for buying the UK government’s 10-year IOUs (I mean government bonds) right now! And even if the International Monetary Fund was relatively downbeat about global economic growth prospects, it was at least positive about the UK…

The Halloween Effect Could Strike (Again)

Let’s not forget about seasonal effects too. The Halloween effect, describing the traditional outperformance of stock markets globally from November through to April, is close to starting. In fact, my own research indicates that a better starting seasonal date for being invested in stocks in developed markets like the UK and US is actually mid-way through October. 

From mid-October through to the end of April, the FTSE 100 has gained an average of nearly 8% per period since 1986 (when the FTSE 100 began). This is the vast bulk of the average 9.5% yearly gain in the FTSE 100 (dividends included), and beats the average May-mid-October period performance of only 1.8% hands down (Chart 1). 

Chart 1: The Halloween Indicator Works Well in UK Stocks

Source: Author, Bloomberg

Follow the Value and Seasonal Trend in the FTSE

The current relative value (comparing the FTSE 100 dividend yield to bond yields) and the positive seasonal effect both argue that we should not overreact to the doom and gloom that surrounds investors at the moment, but rather that we should add exposure to the FTSE 100 in preparation for the strongest stock market half-year. In fact you could argue that this September sell-off could in fact be Christmas come early for the contrarian investor!


Friday, 3 October 2014

Oil Your Portfolio with Energy Exposure

Since the beginning of September, the benchmark FTSE 100 index has dropped over 5%. A buying opportunity, you might well think to yourself. But can we do better than that, by looking at some of the sectors within the UK stock market that have suffered more over the last month?

Bringing up the rear in performance over the last month with a 19% fall is the Food Retail sector – but this is for very good reasons, with the pressure on supermarkets from the German discount chains Aldi and Lidl, resulting in worsening profit performance from Tesco, Sainsbury and Morrisons. In my judgement, while there may be a value investing opportunity in these names, timing any investment is proving tricky, to say the least. 

I would rather focus on another large sector that has been some beaten up – the Oil & Gas sector, which has dropped over 7%. This has been principally driven by the precipitous drop in crude oil prices on both sides of the Atlantic, with Brent crude oil now costing a tad under $93 per barrel, $22 lower than the lofty height of $115 per barrel touched back in late June (Chart 1).

1: The Fall in Brent Crude and the Impact on the Oil & Gas Sector

Source: Author, Bloomberg

Why Could Oil & Gas Prices Rise?

With Winter approaching and the possibility of a cold, hard winter in the United States triggering greater demand for oil products such as heating oil, not forgetting the potential of disruption in supply of oil and gas from our Russian neighbours, we could at some point see a sizable rebound in global crude oil and natural gas prices. 

After all, OPEC nations are also keen to see crude oil prices stay above $90/barrel for their own, budgetary reasons, as oil and gas represent the vast majority of their government revenues. 

I suspect, furthermore, that global markets under-estimate the strength of the growth in long-term energy demand from the mega-sized emerging economies of China and India, which between them boast a population of over 2.3 billion who are currently using a mere fraction of the oil & gas per head that we consume per year in the Western world. 

Oil & Gas Exposure via Stocks, Sector ETFs

If you like this value investing theme, how best to get exposure? You could of course simply buy a few familiar large-cap oil stocks such as Royal Dutch Shell, BP or Total. 

Or you could buy an Oil & Gas Exchange-Traded Fund (ETF), such as the db x-trackers STOXX Europe 600 Oil & Gas ETF offered by Deutsche Bank’s x-tracker ETF division (code: XSER on the London Stock Exchange).  

Two Less Obvious Oil & Gas Investment Options

But I think that there are a couple of more intriguing investment alternatives that are a little less obvious, but which offer greater long-term potential. 

Firstly, there is the Ecofin Power & Water Opportunities Fund (code: ECWO on the LSE), an investment trust listed in London which is currently trading at a substantial 23% discount to its own Net Asset Value. To put this another way, you can buy exposure to £1 of stocks for only 77p! The Fund’s largest holdings are in oil companies, notably the US shale oil play Lonestar Resources and US oil infrastructure stock Williams Companies. In addition, the Fund also pays out a generous 4% dividend yield, a stream of dividends that has remained impressively consistent since 2005 when the Fund started. Since the beginning of this year, this trust has gained 32% to around 162p now, while the UK oil & gas sector has stagnated (Chart 2).

2: The EcoFin Power & Water Opportunities Fund Has Done Well

Source: Author, Bloomberg

A second way to take an interesting exposure to the oil & gas sector is through US-listed Master Limited Partnerships (MLPs), a particular tax-advantaged structure largely for infrastructure assets such as oil and gas pipelines which obliges the MLPs to pay out 90% of their profits in dividends. This high-yielding asset class has performed extremely well, with the London-listed Source Morningstar US Energy Infrastructure MLP ETF (code: MLPP on the LSE) up 16% in sterling terms to 7200p since April of this year. This ETF also also pays out a generous 6% dividend yield, to help investor returns (Chart 3).

3: Master Limited Partnerships Have Performed Very Well

Source: Author, Bloomberg

These are two intriguing alternatives to the more obvious oil & gas investment options which are well worth considering, particularly if you are an income-oriented investor. 


Wednesday, 1 October 2014