Stockmarkets in the Middle East tanked yesterday as Iran rejoined the global economy.
On Saturday, the United Nations nuclear agency confirmed that Iran has taken steps to curb its nuclear programme, as Bloomberg reports.
As a result, sanctions have been lifted and Iranian oil supplies will be hitting the market again as early as this week.
That sent Brent crude to a fresh 12-year low, which in turn meant investors kept flooding out of oil revenue-reliant Middle Eastern nations.
So when does it end, and the buying begin again?
Investor psychology has hit a tipping point
The markets have taken news that Iran is going to be exporting oil again very hard. That’s a little strange, to be honest.
This shouldn’t have come as a huge surprise to markets. It’s not news that Iran was going to rejoin the global oil market. It’s been on the cards for at least a year.
And yet if you ask anyone why oil has cratered even further in the last few days, you’ll be told that it’s down to the threat of Iranian exports.
Meanwhile, reports the FT this morning, “the slide in oil prices pulled Asian equities lower, sending the Japanese stock market briefly into bear territory”.
Hang on a minute. Let me rephrase that. “A vital commodity, which Japan is almost entirely dependent on buying from overseas suppliers, became cheaper today. As a result, Japanese stocks fell.”
Doesn’t make a lot of sense, does it? It’s like saying: “It cost me less to fill my petrol tank this morning. But as a result, I’m so worried about the state of the global economy, that I decided to forego my usual Monday morning bacon roll and save the cash instead.”
What’s going on in the market’s head? Handily enough, Howard Marks of Oaktree Capital has just put out a good memo to clients that explains this very well. It’s all about investor psychology hitting a tipping point.
“In the real world, things generally fluctuate between “pretty good” and “not so hot’. But in the world of investing, perception often swings from “flawless” to “hopeless”.”
For the last few years, investors have been in “flawless” mode. If any problems came up, money printing could solve them. So you had to be in the market.
But in 2015, that started to change. The number of “things to worry about” started to pile up: China’s crash. Falling oil prices. Plunging emerging markets. The strong dollar. The indecisive but rate-raising US Federal Reserve.
None of these things individually came as a surprise. But collectively they’ve been enough to tip investors into “risk-off” mode. There are now too many moving parts to keep an eye on, and investors don’t want to get their legs kicked out from under them as happened in 2008.
Sell first, ask questions later
You can see this even in the rather indiscriminate sell-off in the Middle East. According to Bloomberg, the biggest companies in the Gulf now trade at their lowest valuations in nearly seven years.
Much of this is understandable: Saudi Arabia, for example, earns about 70% of its revenue from oil. I’m not surprised that its stockmarket is down 35% from its most recent peak.
However, Egypt is also taking a battering. Purely based on the oil price, that makes no sense. Egypt is net importer of crude oil, and a lower oil price will save it money.
Now don’t get me wrong – there are sensible reasons to be concerned about Egypt, given its proximity to a troubled region that’s being hit by a massive economic crash. But again, that’s not new. What’s new is that investors suddenly give a damn about all that.
This too shall pass, of course. The oil price will hit rock bottom at some point. We’ll see a few big “events” – dividend cuts, bankruptcies, deals falling through, etc. And oil will be an even bigger pariah than it is now.
But it might take a while, and it’s clear that both investors and producers are still scrabbling to wrap their heads around the new reality. Crossing your fingers and hoping for a bounce-back to $70 a barrel is no longer looking like a viable strategy. What they’re struggling to do now is to find a strategy that does work.
There will be huge opportunities. But for now, I’d be more interested in investing in a sector that’s already had a big shake-out. The good news is that such a sector exists and is on sale right now.
Better times ahead for gold miners
I am, of course, talking about gold – and gold miners, specifically.
“Gold output has peaked in this commodities cycle”, reports the FT this morning. According to Thomson Reuters’ GFMS metals research team, global gold production is set to fall by 3% this year. That ends a seven-year run of rising annual output.
Why does this matter?
Well, unlike oil, I don’t think the amount of gold being produced at any given moment matters that much for the price. Gold isn’t consumed as such, and it’s not anyone’s idea of a necessity. The level of confidence in the financial system is a much more important factor in the value people attach to gold (as can be seen from gold’s recent gains).
However, this does add to our view that the gold miners have reached a point where the industry has made the necessary financial and psychological adjustments to cope with a much lower gold price.
They’re no longer fixated on building more mines, as happens during the rampant bull markets. Now they care about making money or simply staying alive.
That’s a good sign. It suggests that the miners who are still in the running have their heads screwed on, and will treat their shareholders’ money with a lot more care and respect than they did during the bull market. And that suggests that now could finally be the point at which the gold miners bottom out.
Ed Chancellor wrote a great piece in MoneyWeek just before Christmas, explaining this process – and also some of the best ways to invest in the sector. You can read it here.
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