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Benefits and Pensions MonitorOil Prices Soar 500 Per Cent
Oil prices surged from US$10 a barrel in 1998 to more than $60 in mid-2005, following an unprecedented combination of tight supply, escalating demand, and financial speculation. Despite eating into consumers’ disposable income, escalating oil prices have left investors excited and ready to chase this latest trend. Similarly, as we moved from the late 1990s into 2000, investors were caught in the technology euphoria when stock prices skyrocketed. Then the economy began to unravel and the most dynamic engine of the ‘boom,’ the hightech sector, ground to a halt. Investors lost confidence in the economy, while investment managers scrambled to divest their funds of souring technology holdings. So are we heading into another speculative bubble that could burst quite suddenly? Here are four points every investor should consider before chasing any market trend. We’ve seen this before In 1980, at the height of the recession, oil climbed to almost $80 a barrel (adjusted for inflation), up from $15 a barrel in 1972 (see Graph). Following that high, however, oil prices remained depressed for almost two decades. In fact, just a few years ago, the media, economists, and analysts were predicting gloom for the energy sector. Yet, as prices edge toward the $70 mark, investors are once again clamouring to get in on the action. It’s important to note, however, that as oil prices rise above long-term levels of $30, developed countries are gradually broadening their energy sources (for example, by looking at alternative energy sources such as wind and ethanol) and are learning to conserve (for example, the new smart car). As a result, oil’s impact on the economy is far lower than it used to be. In fact, we’ve seen energy usage per dollar of US GDP drop 40 per cent over the last 25 years. Likewise, the International Energy Agency (IEA) has reported that oil demand growth is slowing in China and Europe, even as numerous newspaper headlines continue to vastly overstate China’s huge demand for oil. Cambridge Energy Research Associates estimates that supply could outstrip demand by a minimum of three million barrels per day (bbls/d) to a maximum of 7.9 million bbls/d in 2010. Don’t follow the crowd
Today, the S&P/TSX Composite Index is extremely concentrated with 26 per cent in energy, 31 per cent in financials, and 14 per cent in materials. That means 71 per cent of the index hinges on only three sectors which is not prudent diversification. No one knows how high the price of oil will go before it begins its retreat. But history shows while investments may appear exciting and potentially very rewarding in the short term, they may not hold out over the long term. Look for the right investment managers, not at the daily headlines What is more important to successful investing, however, is the ability to select disciplined investment managers who are not easily swayed by popular opinion, trends, or industry momentum. These are managers who are willing to make sound investment decisions based on their own extensive research and knowledge and stick with it over the long term. The ability of investment managers to tune out the ‘noise’ surrounding market trends of the day is one of the keys to building a solid financial portfolio over the long term. Focus on the long-term is essential Rather, patience is essential. It is through patience and discipline that compelling investment opportunities will present themselves and sound decisions will be made. Investors should, therefore, remain focused on the long term and not get caught up in the lure of short-term returns. This will help bring them one step closer to achieving their long-term financial goals. Bruce E. Winch is vice-president, institutional investments, at AIM Trimark Investments. |
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