With the price of oil set to spike sharply, few strategies are left for stopping the downturn from getting more serious
So, what next? In the past few months, you have dumped the last of your telecom holdings, taken profits on the best oil stocks (who sold Enterprise Oil in July?), loaded up a little heavily on corporate bonds and sold everything you ever had in emerging markets. Defensive stocks like Tesco and Merck looked pricey when you managed to grab a handful earlier this year but now you realise you had a bargain.
Praise your wife, who looked blank when you tried to explain the simplicity of split-capital trusts. Her confusion sowed a seed of doubt that delayed your purchase of that must-have product, offered at the tail-end of the Isa season. Give yourself a pat on the back, also, for resisting the itch of the gold bugs, who bit in the aftermath of the 11 September bombings. Gold is pretty, but a pretty useless investment.
Even after these astute manoeuvres, however, your portfolio is looking a little limp. Where are all those creative investment ideas that used to flow from brokers and analysts? Global economic recovery is due next year but what to do in the meantime? Absolute double-digit returns from a friendly hedge fund would be nice, if you can find one to take your money. Buying forestry estates as a long-term, inflation-proof play has a certain innocent appeal but a more important commodity focus right now is oil.
Alongside the big unknown of how the US-led war against terrorism will pan out, the oil price is now the main uncertainty for investors. With many airlines on the brink of collapse and a general aversion to unnecessary travel, demand has slumped. In the Northern hemisphere, winter is some way off. So, after an initial spike following the World Trade Center bombings, the oil price slid. But for how long?
In 1990, when Iraq invaded Kuwait, Brent Crude nearly doubled to $39 a barrel, triggering a sharp recession and higher inflation in the US. This time, a price hike has been avoided by early and intense negotiations with OPEC, the oil producers cartel, and Russia. No one wants absurdly high oil prices, which stoke inflation and erode the purchasing power of consumers. But the risk of another run-up is one of the more realistic hazards in the current political scenario.
The terrorist groups targeted by the US-led alliance are mostly operating from Muslim, oil-producing nations. If producers like Iraq or Libya are drawn into military engagement, oil supplies will be disrupted and prices will rocket. For sure. A surge like the one before the Gulf War would knock an estimated 0.6% off the projected growth rate of the global economy next year.
There is no upside to costly oil. It is not as if the extra revenue to exporters would offset reduced spending by consumers. Historically, this war dividend tends to be absorbed by non-productive military activity or debt repayment. This is understandable given that the five big 'oil winners' from a rising oil price would be Kazakstan, Venezuela, Ecuador, Russia and Colombia.
These are crucial weeks, then, for both military and financial strategists. Canny investors are seeking bombproof cover rather than brilliant ideas. If the US-led campaign falters or crumbles and an oil price spike results, interest rate cuts will be almost irrelevant. The US bond market is already baulking at promised tax relief packages. In the war on terrorism, we may still have plenty of ammunition. But in the war on recession, our options are thinning out.
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