Good morning,

Needless to say the 55% drop in the price of oil from its peak in June 2014 has led to increased volatility in the equity markets due to contrasting views the selloff in oil has had on the outlook of global economic growth. The first group of investors associate a lower oil price with a slowdown in global demand leading to a selloff in equity markets. Conversely, the second group of investors take a contrarian view and see the lower oil price as a tool which will increase their disposable income creating a stimulus which will contribute to economic growth in the coming years. I tend to agree with the latter and this is why.

The first step is to understand why we are seeing a selloff in the oil price. In my opinion, it is a result of both excess supply due to increased production by the US aswell as the fact that Saudi Arabia and OPEC will no longer be the mechanism to balance the market from the supply side. Following the OPEC meeting, no cuts to production will happen anytime soon, and the Saudis have made it clear that even minimal cuts will not be forthcoming even though there is both supply and price pressure from continuously growing US shale oil output.

Calling a bottom on crude even at these levels would be a gamble. It would make more sense to generate returns from companies in industries which will benefit from a lower oil price rather than try to call a bottom for this commodity. If the price of oil going forward will be determined by demand and supply (and there is a clear sign of excess supply), there is no reason why the price should start increasing any time soon.

My advice is to start adding onto positions in blue chips companies which are not positively correlated with the oil and gas industry. Be careful of Russian, Norwegian, and Portuguese indices, which are among the highest exposed to the Oil & Gas sector. These indices have delivered poor performances since the last oil peak in June 2014. Countries with no exposure to Oil & Gas have all delivered a positive performance.

Since the oil peak only the Technology Hardware sector has seen its 2015e EPS growth revised significantly up by consensus. I expect further earning downgrades in the oil sectors. However, Airlines, Automobiles, Food and Retailers should benefit from some tailwinds.

An investor can get exposure to these industries either directly (through individual holdings) or indirectly through ETFs. To get exposure to the technology sector, an investor could look at the ishares US Technology ETF (Ticker: IYW) which includes companies like Apple, Google Qualcomm and eBay.

Exposure to the companies in the transportation business can be done through the iShares Transportation Average ETF (Ticker: IYT). Companies within this ETF include Delta Air Lines, Southwest Airlines, FedEx Corp.

iShares Stoxx Europe 600 Retail ETF (Ticker: EXH8) will give an investor exposure to the retail sector including companies like Hennes & Mauritz (H&M), Inditex (Zara), Kering (Gucci) and Next. And last but not least, the iShares Stoxx Europe 600 Automobiles & Parts ETF (Ticker: EXV5) will give the portfolio exposure to the auto industry via companies like Daimler (Mercedes), BMW, Volkwagen and Valeo.

Good day and happy trading!

Kristian Camenzuli