Market’s oil sensitivity ‘misguided’
Investors' reactions to oil price fluctuations are looking to an indicator with no historical relevance, according to an asset manager.
Wingate Asset Management chief investment officer, Chad Padowitz, told an Australian Unity Investments briefing, that many investors were failing to see the benefits of lower oil prices.
"There's a fascination with oil at the moment and it seems if oil goes up, the market goes up, and if oil goes down, the market goes down," he said.
"The correlation is merely that when people are very scared they're looking for an indicator of economic health, and oil has taken that banner at the moment, and it's probably somewhat misguided, because that vast majority of people are going to benefit from lower oil prices.
"It's quite localised where the pain is. Historically the correlation [between oil and markets] has been negative or very low, so we think this acute sensitivity is going to play itself out and become less relevant."
Padowitz added that there was an opportunity for investors due to the dispersion of stock valuations between companies that has not been based on performance.
"Something's got to give," he said. "Either the expensive stuff comes down, or the cheap stuff's got to go up.
"Take the financial sector in the US, you look at companies like MasterCard and Visa… they're trading at 20-times earnings.
"People have liked those companies, but they've hated companies like Citigroup and Bank of America.
"Usually the valuation gap between the ones that are perceived to be consumer staples, high growth, high quality, low credit risk, those are traded at a premium [compared to those investors view negatively], but it's normally three or four times P/E terms… at the moment it's a factor of three or four.
"Citigroup is on seven-times earnings, and they distribute MasterCards, which are at 21-times earnings… it doesn't mean one company should be three-times the value of another when neither is having trough or peak earnings at the moment.
"We think there is a massive fear trade going on within US banks — and other sectors — things are not on the stage where you think they are on the verge of a Government bail-out… quite the opposite, these companies are buying back shares and increasing dividends."
AUTHOR
Nicholas O'Donoghue
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