• Over the weekend, Russia and OPEC could not agree to cut their oil production and Saudi Arabia slashed its oil prices
• A fall in the oil price should result in a weaker dollar which is good for the rest of the world
• We expect considerable and co-ordinated stimulus from central banks to steady their economies and stockmarkets

Markets have fallen hard and fast as investor sentiment has swung wildly from extreme greed to extreme fear over the last 6 weeks.

Over the weekend, Russia and OPEC could not agree to cut their oil production and Saudi Arabia slashed its oil prices. This has caused the U.S. crude oil price to fall from $42 a barrel to below $32. It is worth noting that the U.S. oil price started the year above $60 a barrel. This caused markets to fall 7-8% on Monday morning whilst government bond yields fell dramatically so that the yield on the 10-year US Treasury went as low as 0.4% and bond prices rose in value accordingly.

We now wait to see what the response is from central banks and the U.S. Federal Reserve (Fed) in particular. Last week, the Fed responded to market falls with an emergency 0.5% rate cut and more lending. We anticipate a co-ordinated approach from the G7 nations and perhaps a fiscal stimulus package to make sure companies and employees are “shielded” from this financial impact. As a result, we think that there is a chance of a rally in equity markets from here. Any positive sentiment that the Coronavirus is being contained will also help.

The value of the US dollar has fallen about 7% this year and the lower oil price means you need fewer dollars to pay for oil. The U.S. shale gas sector is highly leveraged and the oil price below $45 could create a real problem for these producers. Finally, shale gas is a huge part of the U.S. economy and the U.S.A. is one of the largest oil producers in the world so a collapse in a key part of the U.S. economy should also prompt a response from the authorities. In summary, a fall in the oil price should result in a weaker dollar which would be good for the rest of the world.

Global economies were already weakening because of the impact of the coronavirus. This was reducing both the demand and supply for goods. This should be a temporary phenomenon but many companies have borrowed a lot and may introduce redundancy measures when things start getting difficult, which would make economies even weaker. Governments may have to consider funding companies directly to prevent this from happening.  This would not be good news for the US government’s finances as its balance sheet is deteriorating rapidly. A large increase in government spending makes lending to the government less attractive and the investment return investors would want for doing this should rise.

The models were positioned for a weaker dollar before the oil cut. This has not spared us from the recent downturn. However, the Richmond House portfolios have performed in line with our expectations. We are well-positioned for the co-ordinated central bank stimulus we expect to follow.

With defensive assets so expensive and equities now a lot cheaper, we have used this opportunity to reduce the former and increase the latter. The main beneficiaries of lower oil price and lower US dollar are the emerging market and European sectors. By positioning away from the FTSE 100 into UK small caps we should benefit from lower oil prices, as oil is a large cost for most companies, rather than be exposed to the big oil companies. The UK budget on Wednesday may create opportunities within the infrastructure sector. As mentioned above, expensive defensive assets such as sovereign bonds are now trading on a yield of 0.5% while UK equities are offering a yield in excess 5% on the FTSE All-Share index. This means you should get some inflation protection and this suggests that there is better value in equities than bonds.

We will endeavour to keep you informed as much as possible. As you fully appreciate, we can always be contacted to answer any questions you may have.