We Told You to Invest in Countries Sensitive to Oil Prices, Here is How it Turned Out



At the end of 2014, we published a rather simple piece that gained a lot of traction, on the countries that are most sensitive and the least sensitive to the fall in oil prices. You can read the piece here.  We think there is a lot to be learned from holding yourself accountable and to see if themes you thought would work out, actually did.  Even if we are wrong, there is certainly a lot to learn.

When you start at most investment management firms you are taught explicitly to not invest in simple themes, particularly in emerging and frontier markets where simple narratives can be costly.  We think this is true in specific cases, but if the insight or trend is invested in via a diversified basket of countries, we think that such an approach can produce rewards.  To that end, we revisited the countries we suggested would do better under low oil prices and those that would do poorly.  The results are at the end of this piece.

What is noteworthy is that on an equal-weight basis, the thesis worked.  The Top 20 countries with the most sensitivity to oil, produced an annualized return of 6% over the last three years, compared to 3% for the MSCI Frontier Markets Index and 0% for the countries that were the least sensitive to oil prices.  What is more interesting is that the top 10 countries most sensitive to oil prices produced an annual return of 8.2% compared to a -0.1% return for the 10 countries least sensitive to oil prices.  All returns are on a USD basis.  This means that if you invested $10,000 three years ago in oil-sensitive countries you would have $12,667 today compared to $10,917 for a passive strategy that invested in the MSCI Frontier Markets benchmark.  This is in spite of having countries where things went terribly wrong such as Cambodia and Cyprus which in USD-terms lost -8% per year for the last three years.

So, what did we learn? We learned that investing on the side where you have a conviction of an underlying theme within an economy make sense, but investing in a strategy that is based on the absence of the trend (countries with no sensitivity to oil prices) is a little silly and dangerous.  Despite it working, in that a 0% return was experienced, we think this was more due to chance than anything else.  This strategy would have been easy to implement and relatively inexpensive if invested in a passive way at the individual stock level.  Active asset allocation and passive stock selection is always a reasonably safe, inexpensive strategy regardless of the market or cycle.

Some may call this factor investing (if you are not familiar with factor investing, check this out ), and we don’t really have an issue with that, but we remain fearful and skeptical of buzzwords when they are used for anything and everything.  We do think, however, that Factor Investing as BlackRock describes it in the link is a very clear and sensible approach to investing in Frontier Markets.

With respect to oil specifically, there are so many trends that are impacting oil such that it may no longer be the barometer for global GDP and health in the future.  However, it remains this barometer today and we think the World Bank sums up its relationship with the economy quite well here.

As always, any questions, please let us know.


  1. Fellas. I’m enjoying reading your site. One question. In this post you state, “However, it remains this barometer today and we think the World Bank sums up its relationship with the economy quite well here.” But there is no link. Can you provide the WB link? Tx, Tom

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