Corona, oil, and the big picture

Firstly, I hope you are well and taking sensible precautions. Panic does no one any good, but nor does complacency.

You can be paranoid and wrong a million times, and you’ll come out okay. But overconfident and wrong? Well, that can only happen once.

It seems that we in the UK will go the way of Italy, with all sporting events cancelled, and some level of work-from-home, isolation or quarantine suggested by the government.

This is a health crisis, and an investment crisis. So far. If governments want to solve the latter, they must attend to the former. Luckily, we in the UK have a few things going for us: we aren’t first or second so we can study the effectiveness of other countries’ responses.

Secondly, we have free healthcare. The NHS is not built for this and nor is it prepared, nowhere is. At least we’re not in the US though.

Thirdly, summer in on the way. This disease seems to spread faster in cooler climates, hence the UK government’s policy of delaying. Italy is an anomaly, because a lot of Chinese workers are involved in fashion there. It was the cooler north that has seen the earliest and worst of the outbreak. South America and Africa have hardly any cases, and little or no growth (this may change and prove me wrong, of course).

Having said that, the spread of the virus is rapid, with doublings every couple of days suggesting that many developed nations are going the way of Italy. Germany’s up next, and the UK soon after. Markets are down 30% or more.

Will they fall further? I don’t want to say yes or no, that’s no help. It’s better instead to try and give odds, and decide if you think they’re higher or lower, falling or rising.

For my book, the odds of markets falling quite a lot further are around 50-60%, so I would be more cautious than confident, but not completely. One never wants to be anywhere near 100% sure in either direction. But with the FTSE 100 over 30% down yesterday at its trough, it’s also fair to start asking the question, how low can it go?

Where you look at liquidity, volatility, fund structure, the assumptions of bond-equity anti-correlation, debt levels, interest rates, valuations pre-crash, the oil shock, and market psychology, it seems as though there is so much more to unwind. But it’s never good to be too sure of these things.

How will it happen, I wonder, if things do get worse?

After the last banking crisis, banks have responded by becoming more secure – they won’t do as badly this time round. A few might, in one particular sector, yet I feel we must look elsewhere for the real blow-up this time.

Politicians and central banks are endlessly solving the last crisis, which means no two are ever the same. Comparisons to 2008 will not help us here.

My two spaces to watch are these. Firstly, shale oil, which is the mortgage market of today. Overexuberant lending, low returns, a hamster wheel of doom when only new projects could sustain the debt levels accrued from the old. The unwind will require widespread bankruptcy or some kind of bailout or debt jubilee.

Secondly, asset management. A lot of risk has moved to the fund management and investing sector, as low interest rates encouraged risk taking and borrowing. Never a good combination. Somewhere there is a fund that was overoptimistic, and highly leveraged, and it’s blowing up. Expect gatings and illiquidity.

And don’t forget, I am but one analyst talking about what little I know. Plenty of investors with deeper knowledge of other sectors (corporate bonds, junk bonds, government debt, emerging markets, currencies, aviation, the eurozone) are all also writing of extreme concern.

This is a pretty bleak outlook from me and I’m sorry for that.

Remember not to buy too easily into the corona-narrative. The virus is only the trigger; the reason markets are falling so far so fast is that trouble has been brewing and building up for a lot longer than the virus has been around. Overconfidence, overstretching, overexuberance, neglect of risk, the feeling that things can only go up, celebrating all-time highs, explaining why central bank policy means it’s different this time, stocks like Tesla and Virgin Galactic going north in a vertical line…

The signs of classic irrational exuberance were there. It was a melt-up, and now we’re having a meltdown.

Remember, a lower perception of risk means an increase in risk.

What can we do? As always, we must bring it back to the ultimate question, buy or sell? (I’m talking strictly about equity markets here by the way.)

Red or black, madam?

Having said all that, it’s basically impossible to guess what’s going to happen, and knowing how to profit from the unfolding of these remarkable events is even tougher. Trying to beat the average forecast for the next three or even 30 months is probably no better than dropping it all on black in the casino.

Instead, there are roughly two options that I think are available now. Think long-term trends, and dripping in as the market falls.

Why? Because the world will change, and in the same way as very few people called the top, very few will call the bottom.

The current drawdown is unique only in speed, there have been more than ten drawdowns in the S&P 500 over 20%, and only three of those passed the 40% mark.

So give up trying to predict when it’ll turn good. It might be tomorrow or it might be in 18 months. Great investors and thinkers have said both in recent days.

Instead, try and think about ways the world is changing which aren’t affected by all this.

And if you can handle it, then a sensible strategy might be to pick a long-term trend and drip feed a bit of your cash pile into that, as prices become ever more attractive.

For example, my favourite megatrend just had a fire-sale. Some of the winners of the next decade, the next cycle, are being offered at huge discounts.

The oil shock has become something of a footnote in what everyone is agreeing is a corona-crash. But it is important.

My view is that as bitcoin emerged from the banking crisis, renewables will soar out of the ashes of the oil crash. As shale goes bust, huge steps are being taken on every continent to ramp up renewable investment and deployment. Nigeria, Africa’s oil capital, is rolling out 10,000 solar mini grids. The Tokyo 2020 Olympics is going to be hydrogen-powered. Offshore wind just became economically competitive without subsidies for the first time, and the UK just renewed permissions for the construction of onshore wind.

Oil is finite, renewables are infinite.

Oil pollutes, while renewables do not.

Oil is expensive, while the weather comes free.

Cartels control the world’s oil, while renewables are distributed more equally.

Renewable’s are growing, oil is plateauing.

Electric vehicles (EVs) are grabbing market share, while petrol vehicle sales plummet.

Investors are selling their fossil fuel holdings under immense pressure, and investing in the future.

I cannot see a more compelling case for a major transition from an old economy, to a new one.

Solar and wind costs are falling dramatically, aided hugely by cheaper and better energy storage, to save excess power for later deployment, at night or on calmer days.

The world’s people and its politicians are behind it. Policy is favourable, public sentiment is growing rabid.

Fuel taxes cause riots, while renewable power offers cheaper long-term costs for drivers.

The trends are clear, falling costs, increasing capacity, undercutting the competition, flexible, reliable and decentralised, so you can charge your EV in your garage with solar power from your roof, and it’ll charge faster and drive longer each year.

Scale, technology, investment, education, efficiency, material improvements, collaboration – all these forces are driving improvements in these clean energy solutions.

New business models using subscriptions offer consumers immediate savings on electricity bills, offer taxi and delivery fleets lower costs per kilometre, offer business better energy efficiency and the added bonus of some good PR, and offer homeowners more control over their own supply and demand.

Oil giants know this, and most coal and gas utilities are already being killed off. In my own home, our renewable supplier is cheaper than any regular alternative.

I apologise for the bombardment of positivity, especially after such a nervous start, but I often find people don’t realise the extent and force of this trend.

But for me, it offers the greatest opportunity of any right now.

I understand the people advocating buying oil stocks for their steady plodding and their dividends while prices have been hammered – I don’t think barrels of oil will stay at $30 for long or forever either. And the dividend yields look very attractive, and cuts now will probably be caught up later on. I’m not advocating a 100% green energy portfolio by any means!

And I know oil will dominate the energy landscape for plenty of time to come.

But if you’re looking for growth, for rising revenues, new supply chains, new technologies and business models, then by dipping slowly in now, you could spend the next ten years confidently waiting and watching the change happening to the world, and your portfolio.

That’s exactly the kind of investment I’d be looking at right now. And I’m not the only one. Just look at Tesla, which for me was a real sign of the peak of the bull run. Its parabolic spike was insane, but it reflected huge investor demand for these companies of the future.

Right now, I would be looking to learn as much as possible about what’s happening in the energy industry, what experts are saying and what changes have already happened. Then I’d be looking for the best companies, the ones which could become the oil majors of the future. There’s a lot out there to read and learn, but investing time in this once-in-a-100-year megatrend will be more valuable right now than watching every flicker of the stocks you own.

For me, renewable energy and the new technologies driving the energy transition are a one-way bet.

Green may be just one slot on the roulette wheel, but in the long run, it’s the best choice for investors.

Times now are bleak, and may get far worse before they get better. But stay calm, the world won’t end, and when it doesn’t, the green light at the end of the tunnel will be a lot closer than you might think.

I wish you all very good health, and a calm head amongst all this turmoil.

Best wishes,

Kit Winder
Investment Research Analyst, Southbank Investment Research

1 Comment
  1. vurtilopmer 8 months ago

    I gotta bookmark this site it seems extremely helpful invaluable

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