3 Big Market Risks, and How Advisors Should Respond

Prefacing his comments with a John Kenneth Galbraith quote — “the job of economic forecasters is to make astrology seem respectable” — Vikas Oswal of Advisor Partners argued in a speech Thursday that oil price volatility is likely to continue, but for advisors, there are investing opportunities that will benefit their clients amid the volatility.

Oswal, the CEO and chief investment officer of Advisor Partners, listed three major risks facing investors today. The first is the turmoil around oil price volatility, or “Oilmageddon.” He noted the disparities in the energy market: U.S. oil output is up 45% since 2012, while over the last nine months alone OPEC countries reduced their production sharply. However, consumption continues to rise, while that “overproduction has led to a price collapse.” In turn, that price drop has “led to a sharp fall” in oil and gas exploration. Producing “rig count across the globe has fallen.”

In an interview following his presentation at the Shareholders Service Group conference in San Diego, Oswal said one of the reasons why consumption has continued to increase is persistent economic growth in places like China and India, but he also pointed out that demand for aviation fuel continues to rise. That’s due partly to the emergence of low-cost airlines across the emerging markets serving the rising middle class, but it’s also related to developments in industries like automobiles. In their construction, he pointed out, modern cars use much more plastic, which is an oil product.

The second major risk for investors is the dispersion among the world’s central banks. The “financial crisis of 2008 continues,” Oswal argued, as seen in the so-called global currency wars that followed Lehman Brothers’ collapse. The dispersion is seen in the negative interest rate policies (NIRP) of Japan, Sweden and Switzerland, while in the U.S. “central bank action was decisive” through quantitative easing followed by the Federal Reserve’s decision late last year to increase rates. “Although slow,” he said, economic “healing has been steady in the U.S.”

However, Japan and Europe have seen a “far slower recovery.” Slow European Central Bank action has been due to “German reluctance” to allow even a glimmer of inflation, based on the “Bundesbank’s experience in the 1920s with hyperinflation.”

The third major risk is sluggish growth worldwide. “Russia and Brazil are in recession,” Chinese growth has slowed and “Japan has been asleep for two decades.” In Europe, inflation has been at or below zero in places like Switzerland, Greece and Spain, but “isn’t that a great thing?” he asked. “It is for consumers,” but as the American Depression revealed, “falling prices lead to a slowdown in investing” by companies, which don’t see the benefit in making products whose price is decreasing. That in turn leads to “fewer jobs and higher unemployment; that’s why central banks” fear deflation so much. So is there a chance of deflation? There’s “some risk” of that happening in Europe, Oswal believes. Assessing the Opportunities