The oil price started sinking in the middle of 2014 and, according to FE Analytics, is down about 50 per cent since. However, it has started to tentatively but sharply rebound with a 10 per rise in its spot price over the past week.
Performance of index over 1yr
Source: FE Analytics
Nonetheless, the consensus opinion among commentators is that the oil price has collapsed with material consequences for financial markets. In contrast, confusion as to why it declined so rapidly and how long it will last abounds.
Mustoe (pictured) says the concern and noise around the price plunge is an overreaction as the trend is most likely to cause a short-term benefit before it rebounds “in a few months”.
“To a large extent this [oil’s fall] has been interpreted as negative news: as a reflection of the weak state of the global economy, a driver for deflation in the eurozone and significant trouble for oil producers, implying lower energy-related investments and financial distress,” he said.
“This contrasts with conventional economic wisdom – thus far largely ignored – that a lower oil price is a net positive for global growth, as the benefits from higher real incomes, lower input costs and improved current accounts for the larger group of oil importers outweigh the losses for oil exporters.”
“In my view, the market reaction has been extreme for such a small supply demand imbalance in the context of the past 30 years or so. It’s hard not to believe that the oil price won’t be higher again in a few months.”
This view is not shared by all. Macroeconomic forecasting consultancy Capital Economics, for example, sees oil as rising to $60 a barrel by the end of the year but it added: “We do not expect global oil prices to return to $100 in the foreseeable future.”
More importantly, Mustoe argues that financial markets will continue to be driven by both central bank policy and currency moves, rather than shifts in the oil price.
Mustoe believes that there is nowhere this is more relevant than Europe. He is increasingly positive on European equities, partly because he says the market is reluctant to believe that there’s still upside to growth and earnings to come for companies based there.
“European equities are still valued at a large discount on both a relative and historic basis.
The market reaction has been extreme for such a small supply demand imbalance in the context of the past 30 years or so,” he noted.
“After the European Central Bank [ECB] announced an asset-purchase programme to the tune of €60bn [£45bn] a month to buy government debt, it caused ripple effects among European currencies. Even before the ECB’s policy meeting, there had already been repercussions.”
“The Swiss National Bank unexpectedly abandoned its long-standing cap against the euro, sending the Swiss franc soaring against the single currency. The move has implications for Switzerland’s exporters and it triggered a corresponding plunge in the Swiss stock market.”
The CIO says the ECB’s decision to launch a full-blown QE programme, aimed at revitalising growth and inflation – thereby protecting it from the perils of deflation – is likely to impact countries elsewhere in Europe and send markets incrementally upward.
“The announcement of QE has been hugely supportive for financial markets, more so than for the real economy. It should provide a real boost for European equities and underlines our bullish views on the asset class. The market reaction was instant. The euro dropped to an 11-year low. Bond yields fell as the prices of those bonds in Italy, Spain and Portugal rose.”
“Of course, the launch of QE, in conjunction with weak oil prices, could trigger another round of monetary easing across the world, eventually lifting inflation expectations and leading to stronger global growth.”
The ECB’s new programme was positively received by financial markets but the overall effect on European stocks does not show much change from a year ago, with index up 8 per cent and volatility high.
Performance of index over 1yr
Source: FE Analytics
Mustoe manages a fleet of global funds with total assets under management of around £2bn. The largest is the £775m Invesco Perpetual Global Equity Income which Mustoe has helmed since 2012.
Over the past two years he has steadily built up exposure to Europe with major holdings in the likes of pharmaceuticals giants Novartis and Roche.
Since he took over the fund it has returned 36.56 per cent, underperforming the MSCI World index by 5 percentage points but staying ahead of the IA Global Equity Income sector by 4 percentage points.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
It has a clean ongoing charges figure of 0.92 per cent and has a current yield of 2.54 per cent.
