Oil, oil and it is oil again. The whole world is closely observing the oil prices, are you? Is the lower oil price doing any good or bad to your investment portfolio? How should you position your investments in 2015?
The impact of falling oil prices on the global economy and your investment is a complex subject, but it is also a crucial factor which you cannot ignore when you make investment decisions.
Three weeks ago, I wrote “the real ‘time bomb’ from sharp falling oil price” is the risk to financial institutions. Yesterday’ Straits Times article “DBS loans ‘unaffected by lower oil prices'” just resonated my views. In fact, it seemed a clumsy denial of the danger by just saying “Bank monitoring impact on clients in the oil & gas sector”.
What is the real cause of declining in oil price?
There are always interesting debates on whether the fall in oil prices due to the declining demand or over-supplied Inventory. If the decline in the oil prices is due to the decline in demand, then it is likely to produce a slower global economic growth.
However, I believe that the decline in the prices is largely due to political reasons that resulted in over-supply. Saudi and OPEC may just want to maintain their market share against the US. In this case, that will be good news to the world economy and equity markets.
Lower oil prices to sustain, but supply and demand adjustments will likely restore balance
The major oil-consuming economies like the US, China, Europe or Japan, are very likely to benefit from the lower oil prices, which could propel the global economy in 2015.
With a 50% decline in the oil prices in the last 7 months, we had been witnessing a rapid decline in inflation rates. The situation may be eventually reversed over the course of the year. By mid or end of this year, there may be a change in the market dynamics that would have a positive global impact. However, that may not last for very long and investors should be careful especially with Interest-rate related instruments.
Energy stocks may be an interesting play
Oil Prices has finally seen some rebound recently. Brent crude oil has bounced from the low of $46.6 to $57 and currently trading near $55, at the same time WTI Crude oil has rebounded from the low of $44.5 to $51, currently hovering around $50.
Technically, oil prices appear to have found the bottom which is supported by multi-year low trend-line. But I think a V-shaped recovery is very unlikely.
I believe that the oil prices are most likely to trade sideways in the coming months. Nevertheless, the initial impact likely to put pressure on Oil sectors. iShare Global Energy ETF (IXC), which tracks global energy company stocks has collapsed sharply in the past few months, but seems to be stabilized now.
SGD depreciation – Not all bonds are equal
The Monetary Authority of Singapore (MAS) surprised markets on 28 January by reducing the slope of the Singapore dollar’s (SGD’s) appreciation trend, effectively curbing the strength of the SGD and easing monetary policy.
Unlike most other global central banks, Singapore’s central bank does not set interest rates but instead uses the exchange rate as its monetary policy tool to achieve its objective of price stability over the medium term.
If you have not noticed, SGD has been depreciating sharply for some time since last year.
In Singapore, there is a possibility of zero to slightly negative growth, the inflation is like to average -1% in 2015. This will likely push the property price to fall further. The market does not anticipate MAS to ease monetary policy again in April 2015, but another easing is likely to happen at the October meeting.
Therefore, Singapore dollar could weaken further against USD by the end of the year.
Taking all the scenarios into consideration, Singapore investors may be better off with US-denominated bonds. With the anticipation of rising interest rates, the bond yield curve will continue to be flattening, you will start to see diverse of performance in different bond funds.
Choosing the right bond funds in 2015 is very crucial. – Ivan Guan
I hope this article will be useful to you. Do you agree with my analysis? How do you expect your investment portfolio to perform in 2015? I would be delighted to see your comments below.