By Tom Bradley
Our phones have been much more alive over the last few weeks. Some of it relates to the usual, beginning-of-the-year activity (TFSA and RRSP contributions), but market declines and gloomy headlines are also contributing.
In this turbulent time, we thought it would be helpful to take a few of the more commonly asked questions and provide the best answers we can. We start today with the one that’s being asked the most.
Q: What does cheap oil mean to the economy and my portfolio?
This is a difficult one. I say that because it depends where you live and how your investment portfolio is structured. Having said that, here are my thoughts:
Forgetting about Alberta for a minute, lower energy prices are generally a good thing for the economy. Money not spent filling up the truck, heating the home or manufacturing a widget can be spent on other things, or preferably invested.
- The abrupt drop in the oil price is a de-stabilizing factor in the short term. Markets don’t like uncertainty (I mean more uncertainty, because there’s always uncertainty), so we’re being forced to go through lots of volatility.
- Oil is slowing down the Canadian economy, even though some companies and industries benefit from lower prices. In the short term, job (and bottom line) losses aren’t being offset by growth and increased competitiveness elsewhere.
- If you have a balanced portfolio with Steadyhand, the impact of low oil prices is hard to determine. Using the Founders Fund as an example, about 6-7% of the portfolio is invested in oil-related stocks, so returns have been negatively impacted in the short run. But … the fund has a lot of exposure to parts of the world that benefit from cheap energy (and commodities in general) – namely continental Europe and Japan. These regions are net importers of oil and a lower price for the commodity is a positive for many companies.
- Like everyone, I’m concerned about what dominates the headlines, namely jobs, house prices and debt in Alberta (I have lots of family there), but Steadyhand clients’ exposure does not reflect those Canadian headlines, and is not all bad.
- As noted, we’ve taken our lumps on the energy stocks we hold, but in general our managers are maintaining their positions (or adding slightly) in anticipation of an eventual recovery.
Our managers, along with Salman and I, all think the negative impact of low oil prices is overdone, but there’s no way of knowing how and when the situation will normalize. In the meantime, we’ll continue to take a balanced approach, which means having some exposure to energy in the context of a broadly diversified portfolio.