Carmignac: the collapse in the oil price should be understood in the context of a backdrop of broader deflationary pressures

Marktausblick

Framework to understand the current markets dynamic: The first shock of a quasi-stop in global economic activity, which was all the more violent that it exposed economies and a global financial system which had gone very fragile through financial leverage after 10 years of subsidized cost of debt.

24.04.2020 | 12:53 Uhr

Then we moved to the instability phase about a month ago. In this unstable period, with on the one hand the reality of the shock, on the other the reaction of policy makers, understanding market sentiment is very important to navigate markets movement. So technical and quantitative analysis are used quite extensively on a daily basis.

In this type of markets, you usually get huge performance dispersion between sectors, and within sectors:
When the economy stabilizes, there might be even more diversion because some companies will have survived and gained market share, with reinforced pricing power, while other companies will not have survived from several months without revenues. So portfolio construction matters at least as much as equity exposure management. If you look at the performance of Carmignac Investissement, a pure stock picking global equity funds, hardly manages equity exposure at all, and it is down only -3,2%, when MSCI global equity index is down 15%.

The collapse in the oil price, which reached extremes this week should be understood in this context:
Even if there are very specific technical reasons linked to the availability of storage capacity why the price of WTI for overnight delivery went into negative territory, it remains that the behavior of the oil price is meaningful. It is meaningful because it helps understand the degree of dislocation that can happen in a market when demand collapses and supply is largely inelastic. In that regard, it is difficult to see how a rebalancing of supply and demand can happen in the oil sector without an actual suppression of supply, in other words bankruptcies. Also, this collapse in oil prices represents a concrete specific shock that adds to the overall violence of the economic collapse, for the US economy. The problem with shocks is the waves they create. These shock waves can be most destructive, with a lag, when waves start adding up. We are talking here about the impact to confidence, to the oil industry, in the US, but also in the Middle East, in Africa, in Latin America, to geopolitical relationships (the US risks losing its energy independence), currency stability, etc.

The reality of the economic damage:
The short term economic shock is now getting well understood by markets, even if March and April numbers might still well be shockers. There is also a perception that we’re seeing the end of the tunnel on the health situation, so markets are starting to think about the shape of the economic recovery post-crisis. Everyone needs to understand what a V-shape recovery would be, beyond the immediate base effect: it would be a rebound that would put economic growth back at least on the same slope as before the crisis. In our opinion, this is unlikely before several quarters. Even in the scenario of the pandemic quickly losing momentum, we expect customer behavior to remain wary of second waves of contagion, and companies keen to shore up their balance sheets rather than spend. We also expect very little international cooperation between governments, if not outright tension, in particular between China and the US, which will weigh on global trade. As for policy makers surely, they will have to continue working hard at avoiding a deflationary relapse, but starting from very stretched balance sheets already, their capacity to lift economic growth through policy action will be quite limited in our opinion.

Therefore until production capacity has been actually destroyed, and consumers are ready to bring down their savings rates again, so that inflation can finally pick up, fueled by all the liquidity thrown into the system, and companies invest again, we see tomorrow’s world as still a low growth, low inflation one, which explains our equity portfolio construction centered on secular growth companies.


Gerne laden wir Sie auch zu Carmignac's wöchentlichem Webinar ein, das am heutigen Freitag um 15:00 von Gergely Majoros abgehalten wird.

Das Webinar findet in Deutscher Sprache statt und unter folgendem Link können Sie sich gerne anmelden:

https://www.carmignac.at/de_AT/aktuelles/web-conference/eine-15-minuten-woechentliche-web-konferenz-3940



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