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Paradigm Group Investment Views: The “Oil Shock” and Continued Global Market Impact

Whilst the impact of coronavirus (COVID-19) on the global economy continues to evolve, global markets have suffered further significant falls resulting from a second shock development, this time in the energy sector.

The falls came after the implosion of an alliance between OPEC and Russia caused the biggest one-day fall in oil prices in nearly 30 years.

Russia walked away from an OPEC plan to further reduce production in response to falling demand resulting from the short-term economic effects of COVID-19. This caused Saudi Arabia – which has lost significant market share over recent years – to follow through with price cuts and a promise to lift its production from April, effectively launching a price war with Russia.  Shale oil producers in the US will be the first victim. However in terms of market share, the falling oil price has a knock-on effect in increasing the uncertainty and earnings risk associated with global energy companies and businesses dependant on the energy sector.

In Australia, share price falls of major energy companies were severe, with no companies spared. Even the shares of BHP, which has an extremely robust balance sheet and strong cash flow, fell 14%, to levels not seen for two years. The broader market was also hit hard with indiscriminate selling.

On their own, falling oil prices do have a significant positive affect on global economies, however, this will only be appreciated once short- term uncertainty associated with COVID-19 and general fear in the market dissipates (for example, Australian households spend as much on petrol each year as they do on electricity & gas).

The return to economic normality in China has been slow since the outbreak, however, the situation is improving with people returning to work and companies catching-up on lost activity.  From here, global supply chains should steadily refill.

We wish to assure you that the companies, global funds, property trusts, and fixed interest securities in which the Paradigm portfolios are invested are of high quality. Whilst investors cannot avoid suffering from unrealised falls in the value in global and domestic share prices, it is important to remain focused on long term objectives. We do add that the alternative asset portfolio has benefited from a material holding in gold, a safe haven asset.

With further falls in global interest rates, mounting cash levels, and the likelihood of massive government stimulus packages, we remain focused on selectively taking advantage of weakness and attractive valuations when sentiment begins to turn.

We recognise that times of severe volatility can create anxiety, so please feel free to contact your advisor should you wish to discuss any issues in relation to your specific circumstances.

 

Mike Hawkins, Paradigm Group – Investment Committee Chair

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