The biggest casualty from the oil price crash so far? Russia.
The rouble briefly saw its biggest one-day fall against the dollar since 1998 yesterday. That’s significant because 1998 is the year Russia went bust.
The country is in a better financial position today than it was back then. But unfortunately for Russia, its economy is still way too dependent on oil. So while it has more breathing room, it remains very vulnerable.
Russia is a niche interest as far as most investors are concerned. So you might not think this matters. Trouble is, Russia is just the canary in the coalmine.
Any country, industry or market that was built on the back of expensive oil prices faces a similar problem.
In short, Russia’s not the only one in trouble.
The dangers of being too dependent on any one export
The oil price is plunging right now because there’s plenty of oil to go round, and no one is inclined to cut production.
Oil cartel Opec – which markets had rashly assumed would be able or willing to maintain oil prices at a specific level – decided to maintain production at its latest meeting last week. The biggest player, Saudi Arabia, drove through the decision to the discomfort of some of its smaller rivals.
Do the Saudis want to scupper the US shale explorers? Or is it co-operating with the US to undermine Russia and Iran? Or is it happy to do both – two birds with one stone?
Choose the scenario that suits your taste – frankly it doesn’t matter. The oil price looks highly unlikely to rebound to the $100-a-barrel level in the near future. And that’s been painful for countries who structured their economies on the assumption that oil would remain above that level forever more.
Experts have been warning for years that Russia was too dependent on oil. And the Kremlin has been muttering about diversifying the economy for years too. But reform has never quite happened. It’s been too easy to sit back and enjoy the oil boom, and to indulge in comfortable old habits. Why engage with other countries when you can wield oil like a weapon?
The answer to that question – of course – is that oil isn’t always going to be expensive. And if you don’t have a fallback, you’re in trouble.
Watch out for other commodity-dependent markets
A plunging currency, a plunging market, widely hated – you might be tempted to buy into Russia just now. It might seem like the perfect ‘contrarian’ bet. And you might be right. Buying what makes you feel uncomfortable is often a good idea.
But I won’t be joining you. The honest truth is that – while I’ll admit I’ve occasionally been tempted by the valuations argument in the past, and written to that effect – there’s not a bargepole long enough to tempt me to invest in Russia now.
I might be biased. But put it this way – if Russia was a company, I’d want to see evidence of a turnaround plan and a management team with a track record of competence before I bought in. Otherwise I’d just be worried I was catching a falling knife.
However, Russia is just one extreme example. We’ve just been through a massive resources boom. Lots of nations are dependent on not just high oil prices, but high commodity prices in general.
There’s the likes of Venezuela and Nigeria. But there’s also commodity-rich Australia and oil-rich Canada.
Both the Aussie and Canadian dollars have slid against the US dollar in the last 18 months or so. But there are still plenty of headlines in local papers in both countries about ‘housing bubbles’. If anything can pop those bubbles, it’s a slide in resource prices undermining local industries.
Of course, it’s always possible for certain stocks and sectors to buck trends in investment. And there will be some bargains to be picked up amid the resource rubble (which we’ll be looking out for).
But in terms of bigger picture asset allocation, it makes more sense to go with the wider trend. Find the economies and sectors that benefit from falling oil prices, and invest in them.
For example, this is good news for India. It lowers the country’s import bill. It has provided great cover for the new prime minister to cut subsidies on petrol prices, which would otherwise be unpopular. And it might even allow the central bank to cut interest rates, which is generally good news for stocks.
My colleague Matthew Partridge looked at some of the best funds for investing in India in a recent issue of MoneyWeek magazine. If you’re not already a subscriber, get your first four issues free here.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.