Equity markets performed strongly during November as they continued to rebound from weakness in early October. The S&P 500 index was up around 11 per cent to 30 November from its six-month low on 15 October (in dollar total return terms).
Consumer confidence in the US rose to its highest level since 2007 and GDP growth figures for the third quarter were revised upwards from 3.5 per cent to 3.9 per cent.
Strong equity market performance was achieved, despite the headwind from falling oil prices. Much market and economic commentary this month has focused on a falling oil price and the potential implications for inflation, growth and stock market returns.
Brent crude oil fell almost 20 per cent during November and is down 33 per cent since the start of the year.
The falls are clearly a result of both demand and supply dynamics: weaker demand in Europe and Asia has coincided in a ramp up of production from US shale oilfields. For the last 18 months the US has been the world’s biggest oil producer overtaking Saudi Arabia.
Performance of oil over 2014
Source: FE Analytics
We have spent a good deal of time this year looking at the oil sector as we believe that there are interesting changes afoot with major oil companies seeking to cut capital expenditure. Indeed, the recent fall in the oil price is likely to accelerate these changes. 
However, we currently own one stock in the sector (Statoil). We have spoken to the company and are confident that they have planned well for such an oil price scenario and will maintain investment in the business and the dividend despite a lower revenue outlook as they have significant low cost production.
Perhaps more interestingly is what a falling oil price might mean for the wider economy. We do not subscribe to the view that a falling oil price is suggestive of a renewed economic slump.
In fact, we are of the view that it is akin to a global tax cut and it is extremely good news for the global economy, particularly those countries dependent on oil importation.
Whilst the fall in the price will inevitably lead to further falls in inflation rates we see this as ‘good deflation’ i.e. that it is deflation in the non-discretionary element of consumer expenditure freeing up spending for discretionary expenditure with a larger multiplier effect.
Interestingly, work from HSBC, looking back over history has shown that the S&P 500 has risen 11 per cent on average over 12 months following a 30 per cent fall in oil prices.
We are keeping a close eye on the widening of credit spreads in the high yield energy sector and the resulting impact on the wider high yield asset class (18 per cent of all high yield debt in the US is energy related).
Any default by energy companies could have wider repercussions for bond and equity markets.
China is a large beneficiary of falling oil prices. As a major consumer of oil, it is facing significant headwinds as it transitions to a consumer-led economy.
We have recently returned from China and felt we should include comments on our trip. Consensus has become very cautious on the outlook for China and we felt the trip went someway to reducing those concerns in our minds.
We spent 10 days visiting Shanghai, Beijing, Hong-Kong and Macau. The reason for the trip was to evaluate investment opportunities for both international companies with significant exposure to China and domestic Chinese companies.
We are finding many stocks with meaningful Chinese exposure that are screening attractively currently, hence we wanted to gain a deeper understanding of current and future trends in China.
Our overall view on the Chinese economy is not greatly changed. We see a continued moderation in overall growth but no imminent ‘sub-prime moment’. However, certain secular trends in China look quite powerful and long in duration.
Effectively China is a not a single country; it is a vast continent made up of 34 distinct provinces and 660 cities (120 of them have >1m people), each with different economic drivers and each at vastly differing stages of economic and social development.
To look at China as one country is to generalise greatly. It’s probably akin to thinking of Europe as one country, itself made up of 58 countries and 850m people. Europe is not homogenous and neither is China.
We would argue that many companies/industries could continue to prosper even in an overall weak economic backdrop, and vice-versa. We met a variety of economists, industry consultants and foreign/domestic companies.
Over the course of around 30 meetings we have gathered a sense of what we believe is going on in China. There was broad thread of consistency to the major themes and issues.
The key detractors from the China story are excessive credit growth in the past five years, the emergence of a potentially systemic risk in the form of shadow banking, slow progress on structural reforms, an ageing population and simply the law of large numbers.
China’s current economic growth rate of 7 per cent is the equivalent of creating Indonesia every single year!
The key positives for us were early signs of a government that is willing to make tough (reform) decisions, a long road for economic development remaining and a faith amongst the people of China that they can do it.
Sentiment towards China is cautious. Some investors think it is about to have its sub-prime moment. We view the outlook as ‘ok’. We don’t see an imminent threat of financial crisis nor do we see a return to historic growth rates.
We are certainly not put off from investing in companies with significant exposure to China. In fact some segments of the Chinese economy could still see exceptional growth in a global context.
Stephen Anness (pictured on first page) and Andrew Hall are co-managers of the Invesco Perpetual Global Opportunities fund. The views expressed are their own.
