The oil price has plummeted almost 50% from last summer’s peaks and continues to languish around its lowest ever level, driven by weakening global demand, increased US production and robust supply from the Middle East. Elsewhere, the fall has been exacerbated by a strong dollar as the demand for dollar-denominated commodities was affected.
The stock market has seen subsequent volatility which provided a disconcerting jolt for investors in the short term, especially from the hit to energy-related companies. However, the oil slump does not actually appear to pose as great a threat to equities in the longer term because, as the chart above published by Blackrock shows, energy stocks make up a relatively small portion of major global stock market indices. For example, energy companies are only roughly 8% of the All Country World Index, while in the US energy represents roughly 8.5% of the S&P 500 – down from more than 16% in June 2008.
By comparison, consumer discretionary and consumer staples companies, both beneficiaries of lower energy prices, make up more than 20% of the index, notes Blackrock. Indeed, oil price falls have actually had a positive knock-on effect on consumers’ spending power and so consumer stocks, which form a larger portion of most equity benchmarks, are likely to be net beneficiaries.
Blackrock chief investment officer Russ Koesterich says: “While increased volatility in energy prices may produce another bout of volatility in financial markets, we believe that for the most part lower oil is a positive for developed countries and many emerging markets. Given that oil consumers have a greater propensity to spend than oil producers, lower energy prices have generally been pro-cyclical. According to the International Monetary Fund, a 10% drop in oil prices translates into a 0.2% increase in global GDP. With oil prices down nearly 50% from their summer highs, this should represent a significant tailwind for global growth in 2015.”
Comments