Monthly Market Report - December 2015

25th November 2015

With commentary from David Stevenson

Time for a confession. I'm finding it very hard not to feel too smug about falling oil prices. I've been boring investors and advisers at various events over the last six months about my bearish views on oil. Put simply, I've long felt that the Saudi's job wasn't anywhere near finished. The idea that they'd be happy with oil at $40 has always struck me as laughable. We need a proper push down to an extreme low of $20 before the real pain is felt in US Shale. Sure enough we are now seeing the latest push down in oil prices - entirely predictably. International benchmark Brent crude has fallen back below $45 a barrel – below the temporary bottom it hit in January and the lowest level since its upward climb from $42 in late August. US benchmark West Texas Intermediate is also back below $42 a barrel. I think this is hugely significant as it indicates that we are now approaching the capitulation phase where all those suckers/optimists who thought we'd seen the worst are forced to sell, pushing prices sharply lower, triggering mass defaults and wholesale industry restructuring.

I should also say that I think its fantastic news for the global economy, as we'll eventually see sharply lower energy prices revitalise consumer demand in early to mid-2016, but not before we see big volatile swings in the UK stock market.

If all this wasn't bad enough in the short term for equity investors I'd also draw attention to another significant trend - weakening dividend growth in Europe. Andrew Lapthorne at Societe Generale reports that although the US and Japan have been boosting dividends (from what are admittedly miserable levels), UK and Eurozone dividends have gone nowhere. Dividend downgrades are also common and cuts are on the rise. Hardly what you'd expect if corporates were seeing a profit recovery. My sense is that these declining energy prices and worries about dividend growth will weigh on the mind of equity investors in the last quarter of 2015.

One last small observation. An accompanying article about property reminds us that ordinary investor's don't need many excuses to avoid seeking financial advice about investment. If property remains a one-way bet (!) why invest in the volatile option? So how do we get investor’s collectively engaged with their financial future? A recent report from Pershing Ltd gave one answer - stop talking about opportunity for investment growth and focus on specific life events. According to their survey the "vast majority of the 1,002 mass affluent and high net worth UK individuals surveyed for the report sought financial advice correlating to a specific life change. The most popular reasons are a career move (13% of respondents), location change (13%), marriage (9%), retirement (8%) or financing a property (8%). Most of the key life events that prompt individuals to seek advice take place between the ages of 38 and 50 with those 40 and under experiencing twice as many high-value life events than the older client groups." It seems that those advisers who've long argued for a focus on financial planning rather than investment opportunities were spot on after all!

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