Fortunes can be made from share turmoil

Deflation is everywhere. This month electricity prices are falling. Variable interest rates are being cut. Fuel prices at the pumps have been coming down for the past two years.

This phenomenon is a reflection of supply exceeding demand in a wide range of products, including oil and money.

In commodity markets cereals, milk and copper are among the products in abundant supply.

In struggling to clear the related build up of stocks producers have cut prices sharply, providing buyers with unprecedented bargains. Steel, another commodity under severe downward pressure, is being purchased by users at prices not seen for many years.

All of these price movements have different consequences in various parts of the economy.

If you are a steel manufacturer conditions are rotten. Recent headlines about large swathes of the UK steel industry being at risk of closure are testament to that.

On the other hand manufacturers of sheds and cars are benefitting from lower input costs.

Dairy farmers are experiencing the toughest trading period in almost a decade while consumers of cheese in the US market are benefitting from multi-year low retail prices.

These dynamics are a stark reminder of how markets work. Those who advocate one-way price movements in any products are usually delusional.

Take food as an example. It became commonplace among supposed experts in the noughties to argue that food was undergoing a permanent bout of inflation because the world was not able to keep up with growing populations.

Oil, too, was the subject of similar definitive forecasting which argued finite supply and continuing economy growth would keep prices on an upward tack. Both were so wrong it is hard to take them seriously today.

Equally, it is dangerous now to listen to those who believe energy and food prices are incapable of recovering because the world is awash in oil, gas and food supplies.

It is true that stocks of everything from oil to cereals are at all-time highs. This will keep prices suppressed for some time but I tend to the view that market forces are all powerful. One way or another supplies will taper off as producers face up to the harsh realities of low prices.

At the same time very low prices are pushing up consumption rates, helping to eat in to stock levels. These inputs will stabilise markets, and will be reflected in bottoming and ultimately rising prices. Timing that change is hard to do.

Amid this volatility fortunes will be made and lost.

Equity investors who piled into companies producing oil and steel five to ten years ago are suffering hugely now.

Investors in airlines, consumers of vast amounts of jet fuel, have recorded two years of record profits. It is challenging for an individual — or indeed a company - to work their way through this.

For an individual, diversification seems to be a key element in protecting yourself from very disappointing returns. Identifying a set of high quality companies in a wide range of industries, and buying them through thick and thin is one approach.

Over the past six months, for example, a company like Exxon has been of interest because it is a long-term conservatively managed blue chip company paying a steady dividend.

It’s share price was smashed amid the collapse in oil prices, and some analysts remain wary of its ability to recover soon.

Yet, for those investors who are planning for retirement in say 20 years time it could be a good time to dip into Exxon and start building a piece of your portfolio there.

Conversely, I wonder is it time to take some cash off the table in the large US airlines that have grown share prices by multiples in the past two years.

These, too, are good companies but if the share price increase has made airlines relatively over indexed in your savings pit it could be time to plan a change.

Being alert to the big changes happening in the global economy is important when managing a savings account or pension fund for long-term retirement returns.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.


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