Oil has been the bête noire of financial markets this week, as the seemingly mad news breaks that the price has fallen into negative territory – in other words people were being paid to take it away.
Oil is to the global economy what flour is to Mary Berry. You can’t make much without it. According to the FT, demand is usually 100 million barrels a day and this has fallen by one-third since the world went into lockdown. We’re not flying, driving or making so much stuff.
In the States, to be precise in J.R. Ewing territory of West Texas, prices dropped to MINUS $40 a barrel for May deliveries as sellers paid buyers to take the oil off their hands. It cannot be emphasised enough how much this is NOT NORMAL!! Brent Crude – a broader global indicator of oil prices – is at its lowest level for 18 years.
Both BP and Shell’s share prices are down by 35% over the last 3 months. Oil companies also normally pay quite nice dividends – regular dollops of cash a firm will divvy out to its shareholders when the going is good – but these look increasingly difficult to keep up. Let’s say your shares are worth a pound and you pay out 3p as a dividend per share – that’s a dividend yield of 3%. If your shares fall to 60p and you still pay out 3p – your dividend yield shoots up to 5%. Both Shell and BP currently have dividend yields of 10.5% which now look as unsustainable as my current wine consumption levels.
This may seem very distant and academic for all but the most enthusiastic traders. But it will probably impact every reader. BP and Shell are amongst the largest shares in the FTSE 100. BP makes up 5% of it. All oil and gas firms combined are about 12% of the total. If you have a workplace pension, or a portfolio in a robo adviser, or a ‘multi-asset’ fund – chances are that in a mostly shares-based portfolio you will have at least £20 of every £100 in the FTSE. And so roughly £2 of every £100 in firms like BP and Shell.
One side-effect of oil’s slump is a resurgence of interest in ‘ESG’ funds – funds that filter investments on Environmental, Social and Governance concerns. Of course these funds will typically avoid oil which has been one major driver of relative outperformance.
Here's some food for thought.
Look at the 5-year performances on the chart below. (Before all the tech heads shout at me, this is not a submission for the Nobel Prize in Economics, it’s just broadly illustrative, so chill!)
The blue line is Liontrust’s global Sustainable Fund – it has ‘only’ fallen by about 6.5% in the last three months.
The orange line is Pictet’s Environmental Opportunities fund – again this is a global play – it has fallen by just 8%.
Compare these to a passive broad-brush ‘little bit of everything’ global fund like the Vanguard LifeStrategy 100% option (green line) which is off by 15% and the more local FTSE All Share which is down by 22%.
I know I’m not comparing like for like BUT these numbers certainly a) make the case for global diversification and not having all your eggs in the British basket. But they also b) table an interesting discussion about the pace at which ESG funds move from the former classification as ‘stuff for soft hippies who don’t want to make money’ into ‘the only sensible way to think about solid future-facing businesses in a world which looks nothing like it used to….'
Thanks all. Have a lovely weekend. I leave you with a picture of the new sign on my home office door which I was driven to yesterday after multiple instances of unscheduled appearances of children on client video calls. I have three coloured cards to choose from and stick on the door underneath!
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