.

 

 

Three Major Price Triggers Right Now

17.02.2016

Is the prevailing stock market decline a buying opportunity? The answer depends on the oil price, central banks and the Chinese currency.

The oil price and the global stock markets have followed each other closely this winter. While it is easy to understand why the Oslo Stock Exchange and oil prices are correlated, it is difficult to see why it should have a negative effect for stock prices in Germany, as their main import commodity has become cheaper.

The reason lies in the credit market. Investors are concerned that the rise in commodity prices after the turn of the century led to a giant, debt-financed investment bubble.

The fear is that exceptionally low oil prices will trigger a tsunami of loan losses that paralyzes the credit market and then causes a credit squeeze, which in turn will paralyze the entire economy.

Our main scenario is that the oil price will be swinging back and forth at low levels over the next few months before the start of an uptrend in the second half of the year. If OPEC and Russia agree on a cut, the rise can come sooner, and it would then be a major trigger for both oil prices and the stock market.

Powerless?

Another reason for the winter stock market collapse is fears that monetary policy has lost its force. Investors are afraid that the so-called Draghi and Yellen put has disappeared and that they are now balancing on a tight rope without a safety net.

In the US, the problem is that Yellen has not yet signaled any turnaround in monetary policy and is still planning to raise interest rates. In Europe, the problem is opposite.

Market participants are afraid that Draghi will take an aggressive approach and bring interest rates deep into negative territory. If that happens, the interest margin of the banking industry will be squeezed, because deposit rates can hardly go below zero.

This, together with fears of rising loan losses has put European bank stocks under strong downward pressure.

Massive devaluation?

The third headache is China and fears of a massive devaluation. Despite the fact that China has a trade surplus of 400 billion dollars per year, the Chinese foreign exchange reserves are falling rapidly.

This is because China is experiencing capital flight, and if this continues, the fixed exchange rate regime may break down. Expectations of a devaluation can easily become self-fulfilling.

If the Chinese currency collapses, commodity prices will experience another dive and the world economy will be hit by another deflationary shock.

Fish and fertilizers

This week we put Marine Harvest and Yara into the Dovre portfolio. The latter offers a P/E of around 8 for the current year with a stable earnings outlook. This, together with low debt and a dividend yield of around five percent points makes the stock seem cheap.

While Marine Harvest is down four percent year to date, futures prices for salmon at the Fish Pool exchange are hitting new records daily. The strong price development of the salmon prices makes the setback in the share price look like a buying opportunity.

Dovre portfolio:

  • Kongsberg Automotive
  • Storebrand
  • DNO
  • American Shipping Company
  • Marine Harvest
  • Yara

In: Marine Harvest, Yara

Out: Panoro Energy, Opera