Monday, 10 March 2014

Weekly Newsletter, March 10 2014

Is The Ukraine Question Going To Hit Markets Again?

And things seemed to be going so well for global stock markets! Mid- and Small-cap indices hitting new highs, then followed by the large-cap benchmark indices such as the S&P 500 in the US and the Euro STOXX 50 in the Eurozone. Then comes President Putin with his move into the Crimea (where the Russians maintain a strategically-important Black Sea naval port), and hey presto, we suffer a nasty, if short-lived, dose of market volatility.

But notice also that the trend in mid-term volatility (shown below) has been rising from the lows hit in early January, well before the Ukrainian-triggered flare-up in volatility over February.

1. US Mid-Term VIX Volatility Gently Rising


Whether or not this market volatility will worsen will depend on whether the US and Europe press ahead with any form of economic sanctions against Russia.

I believe that Europe in particular will not be hasty to pursue this course of action, given the value of Russian gas to the Old Continent.

A Few Energy Policy Considerations

This political instability in Ukraine underlines the fragility of European energy policy, given that one-third of Europe’s natural gas supplies come from Russia via the Ukraine (particularly important for Germany and the Netherlands). Thus, any economic sanctions against Russia are very likely to have a heavy hit for the European economy too, which is precisely why sanctions look unlikely in the near-term.

Of course, this means that European nations will not want to rely too heavily on Russia for natural gas output in the future, as this recent episode has underlined just how toothless they are in the face of volatile Russian foreign policy.

As they are committed in general to reducing their reliance on nuclear power (Germany in particular, but also France), what can they do about the precarious natural gas supply situation?

Industries That Should Benefit From This Situation

Renewables will benefit of course (solar, wind, hydro, biomass), which is one reason why clean energy funds have been performing so well (see chart below).

2. PowerShares Clean Energy ETF is Roaring Away


Algeria also benefits from French largesse as the French pay over the odds for Algerian natural gas supply for diversification reasons (and historic reasons too).

But I believe that the ultimate winner will be shale gas exploration and production in Europe, led of course by the UK. But other nations will inevitably follow…

I remain a big long-term fan of oil service companies can that enable/facilitate shale oil/gas exploration, extraction and processing/transportation. I would rather take exposure to these companies (who provide the “shovels”) rather than the exploration companies themselves, given the uncertain hit-and-miss nature of exploration activity.

The Oil Service companies have shown some excellent share price performance over the last month, with the IEZ iShares US Oil Equipment & Services ETF up 15% in a month!

3. iShares US Oil Equipment & Services ETF +15% in Feb.


UK-listed oil service companies that continue to do well on the back of this theme include: 

Kentz Corporation (KENZ.L), Petrofac (PFC.L), Wood Group (WG.L), 

KBC Technology (KBC.L) and AMEC (AMEC.L).

An Interesting Perspective on the Current Bull Market

This week, the bull market that started in 2009 celebrated its fifth anniversary. Now, there was a big correction back in 2011 at the peak of the Euro financial crisis, when the S&P 500 index lost almost 20% form peak to trough. Since then, we have surged back to hit new highs.

The chart below from puts the current stock market rally in to historic context. It highlights that the current rally in the US S&P 500 index is, thus far, nothing particularly remarkable or stretched when compared against previous historical bull market rallies.

4. Similar in Duration to the Average Rally, But Not As Strong!


This all suggests to me that, should we navigate these choppy Eastern European without a full-scale “new cold war”, there is still further upside potential over the medium-term for developed stock markets, while economic growth momentum continues to slowly build up steam on both sides of the Atlantic Ocean.

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