Update: Oil falls how have Frontier Markets fared?

Update: Oil falls how have Frontier Markets fared?

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Update: Oil falls how have Frontier Markets fared?

We wrote a piece at the end of the last year on which countries we would expect to benefit from the fall in energy prices.  You can read that piece here. Given that we are almost ¾ through 2015, we thought it would be useful to take a look at whether there has been any legitimacy to the theory that those countries that benefit the most from the fall in oil prices would experience the best investment returns in 2015.

Looking at the table below, it shows you the returns for those countries that were poised to benefit from the drop in oil.

CountryYTD Return ($USD)
Bahrain-9.6%
Jamaica23.99%
Lithuania1.37%
Bulgaria-13.45%
Jordan-5.04%
Cote D'Ivoire-5.29%
Palestine-4.24%
Cambodia-2.36%
Cyprus-15.02%
Morocco-7.87%
Equal-Weight Portfolio Return-2.69%

The table following, then looks at those countries which would suffer the most from a fall in oil prices.

CountryYTD Return ($USD)
Colombia-35.50%
Argentina14.88%
Saudi Arabia-7.29%
Serbia-9.98%
Laos-12.05%
Oman-8.55%
Peru-35.28%
Kazakhstan-34.90%
Uganda-23.72%
Egypt-27.93%
Equal-Weight Portfolio Return-18.03%

As you can see, the difference in returns on the basis of an equal-weight portfolio to these countries is 15.4%, which is quite remarkable given that we had already experienced low prices in December and furthermore, we are only in September.  Something even more noteworthy, is that as you can see on our dashboard, an equal-weight portfolio to Frontier Markets would have returned -10.4%.  Therefore, a portfolio composed solely based on oil price sensitivity would have outperformed the broad-market index by almost 8% YTD.  Now, if you had actually focused on selecting quality equity names within those countries that benefit from a fall in oil prices you would have likely done multiples better than the broad market index.

We are not surprised by these results but certainly do feel reassured, that markets are behaving rationally.  There are a few lessons from this experience which we believe are noteworthy.

  • Opportunities to profit from major events persist, even after those opportunities have been identified.
  • While the most profit can be made anticipating these events and associated movements (fall in oil price), there is a safer profit to be made in reacting to these events.  This necessitates being ready for market events, but remaining patient and acting only when the situation has been confirmed.
  • Even in our portfolios of countries that would most-benefit and those that would lease-benefit there are countries that have experienced returns opposite to what you would expect.  This highlights the importance of diversification.  Having a good investment thesis without risk management is gambling, not investing.

What we would recommend at this stage, is for investors to think about how their portfolio should be positioned in the event of a rise in oil prices.  Our house view is that oil prices are a reflection of a demand problem, not a supply problem.  Regardless of supply, the world could not sustain sub-$60 oil prices if China, Brazil, and India were growing at their full potential; they are not.

We hope you found this helpful, and as always, any questions just ask.

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