Emerging markets

Do movements in the price of oil foreshadow anything about emerging market equity relative performance?

Maybe.

Image

The EM is the source of incremental global demand. Developed world demand is normally fairly flat.

The demand (and somewhat for supply) for oil is relatively inelastic. A large increase in price usually has only a small decrease in demand.

However that means the reverse also works: a small decrease in demand can have a large impact on price. If the emerging market demand drops, the impact on oil price can be large. The correlation is sizeable, but not perfect, and the divergence is what creates the occasional profit opportunity.

Here, you’d probably try to make the case that emerging markets are mispriced relative to the signal coming from oil.

Image

But too many other things matter – starting valuations, the demand and supply dynamics driving oil, the pandemic and the co-movement of other macro factors.

In this instance, we know it is the supply side story associated with Russia (as per our earlier notes this morning).

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.