Timing an entry back into the markets

Good morning,

The headlines say that markets are trading lower due to a continued decline in the price of oil which is leading to concerns that global growth is slowing down. However, I believe it is more a result of a market which was overbought short term and lead to a profit taking situation. All technical indicators pointed towards a short term correction in the market. I’m of the opinion that it was not economic data that triggered this correction but cashing in on profits before the close of the year and realigning positions to address the strategy investment managers want their fund to adopt going into 2015.

Apart from profit taking, we are also seeing headwinds in the oil industry which is having a negative impact on global indices which include oil stocks. However in the medium to long term, equity valuations remain attractive. The fact that Brent crude is now 46% lower than its highest price this year is a positive for many industries. Airlines stocks and auto stocks are amongst the industries that will benefit most from a declining oil price. On the other hand, oil exploration companies are the ones which are hit hardest in an environment of a lower oil price.

The price of oil is expected to remain low because the problem is not just over supply but a price war between the oil producing countries. The United Arab Emirates said OPEC will resist output cuts even if prices slump as low as $40. According to the UAE energy minister Suhail Al-Mazrouei OPEC Countries won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day. The market will stabilize itself without OPEC targeting a price.

An interesting ETF to follow in an environment of a reducing oil price is the STOXX 600 Travel & Leisure (Price) Index which could be purchased by an investor as the iShares STOXX Europe 600 Travel & Leisure UCITS ETF (DE) (Ticker:SXTPEX). Companies with the largest weighting within the index are the likes of Ryanair, EasyJet, Carnival, InterContinental etc. All companies which benefit from a reduction in the oil price.

Another ETF which is worth keeping under the radar is the SPDR S&P Retail ETF (Ticker:XRT). Retail sales in the US have benefited from a weaker oil price increases disposable income and stimulates consumption. Companies with the largest weighting within the index are the likes of Kroger, Walgreen, Office Depot etc.

Regarding economic news which is relevant for the markets today, the market expects industrial production for the US for the month of November to show an increase of 0.7% month-on-month.

Even though going into 2015 the outlook global economies have a lot of challenges to face, it is a fact that equities offer an earnings yield which is superior to that offered by many other asset classes and investors should take advantage of weak days in the markets to add to positions. I am of the view that quantitative easing will take place in Europe during 2015. With the ECB buying sovereign debt and the price of oil and the Euro expected to remain weak will all act as tools to stimulate growth in Europe. Investors should take advantage of weak days in the market to average down on positions positioning their portfolio for 2015. Investors should also start paying more attention to technical indicators in an environment of increased volatility which is expected to stay in the equity markets.

good day and happy trading!

Kristian Camenzuli