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[Dow Jones columnist David Cottle argues that if you've been smart enough to invest in oil producers' stocks, higher oil prices have been kind to you. But, eventually, the focus must move to the consumers.]
So far, higher oil prices have been good to equity investors, at least those smart enough to play them traditionally and buy the producers’ stocks.
A barrel of Brent crude cost between $70 and $80 for most of the 12 months to September 2010, but the price has climbed and climbed since, taking the oil majors’ shares with it.
The stuff is now above the magic $100 level once more, but, in the last six months, developed-market energy stocks have risen 35%, beating the broader indexes handily in the process. Morgan Stanley/Capital International’s developed-economy benchmark is higher in the same period, too, of course, but “only” by 26%.
Moreover, despite all the usual oil-rise worries about speculators cutting out middlemen and buying futures themselves, thereby flooding the market with greedy amateurs, sticking with stocks has been the better plan. On a total-return basis, energy equities have outperformed the investable energy indexes.
Political unrest across North Africa and the Middle East collided with a weaker-dollar environment, based on tightening of monetary policy in Asia and the increased chance of it in Europe. In short, energy stocks have both geopolitical and monetary reasons to head north, along with the general recovery background that’s been with them for a while.
Now this is all very nice, but, still, at some point investors’ focus has to move away from the producers of oil and onto its consumers. In case you’ve forgotten them, they’re the businesses and households we’re all looking to for signs of sustainable economic recovery. And, for example, it’s been estimated that every $1 per gallon increase in gasoline prices reduces overall U.S. consumer spending power by $120 billion.
High stakes, then.
In a sense, quantitative easing hosted a jolly little post-crunch party, one at which stocks, bonds and commodities like oil could all get high at the same time. But the party is winding down as they all must, even the good ones. Developed-market equity arrived late anyway, but it looks as though it’s already had all the fun it can expect.
We’ve had the sobering prospect of tighter monetary and fiscal policy to mull over for months, along with cash-strapped governments cutting their economic involvement after years of plenty. Now along come higher energy prices too. Higher for longer, by the look of them.
If none of the foregoing screams “buy equity” at you then you’d probably find it hard to disagree with Gerard Minack, chief market strategist at Morgan Stanley in Australia.
He recently said: “the rise in crude prices through $100 is, in my view, just another sign that the sweet spot for developed-market equities is almost over.”
Admittedly, the indexes probably can move higher near-term, but, he says, the second half of the year looks set to be much more challenging.
Doesn’t it though?
Although I don’t have precipitous decline as a base case, my view is that DM equities will probably make their highs for 2011 in the first half, Minack goes on.
Not long to go then.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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