Trevor Greethamns Clockwise December: Oil’s plunge recalls the late 1990s

Oil’s plunge recalls the late 1990s

The US dollar is strong, the oil price is falling and emerging market currencies are under pressure, yet US equity indices have been making new all-time highs. We see strong parallels with the disinflationary 1990s and our tactical positions in favour of US equities and against commodity sensitivities have been paying off. Near term, we are only moderately overweight equities, as the plunge in the oil price could trigger credit stress. Longer term we remain bullish however. A low oil price is a stimulus for consumers and global growth should pick up over 2015.

Lead indicators in focus

Growth

• Our global growth scorecard has turned marginally negative after a 22-month upswing. This reflects a highly desynchronised world economy: the US is booming, China and EMs are slowing, Europe is weak and Japan is temporarily back in recession. However, we are unconcerned about a global downturn.

Inflation

• Our global inflation scorecard is resolutely negative, as was mostly the case in the 1990s. Lack of wage growth and downward pressure on commodity prices are creating deflationary pressures.

Current Asset Allocation positioning

• We have been overweight equities since 2012 on the back of recovery with loose policy and muted inflation. However the overweight has been reduced more recently as we have some concerns about an oil-linked credit event.
• We maintain a large underweight in commodities. China’s economy continues to slow. Excess capacity and US dollar strength remain powerful headwinds. Failure to agree OPEC production cuts is triggering a price war in crude oil.
• We are neutral on government bonds on a tactical basis given disinflationary pressures though we expect poor returns when the Federal Reserve starts to normalise rates in 2015 H2.

Trevor Greetham
Director, Asset Allocation, Fidelity Solutions

Trevor Greetham joined Fidelity in January 2006. In addition to managing multi-asset funds, he is Director of Asset Allocation within Fidelity Solutions. He holds an MA in Mathematics from Cambridge University and is a qualified actuary.

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