Finance: Drop in oil prices can be a good thing

PHUKET: When it comes to investing, many make it more complicated than it actually is. What I try to do is use common sense and simplify the process.

The two big factors driving global markets right now are central banks and the drop in oil prices. Banks have been pumping trillions of dollars into the global financial system ever since the financial crisis of 2008 and 2009. This flood of money has caused the ‘bull run’ in stock prices over the past few years.

A lot of people were worried that all the printing by central banks was going to create inflation. This is what the gold bugs have been saying for the past few years. However, inflation has remained low and that’s why gold has dropped from more than US$1,900 an ounce to under US$1,300.

With oil prices now dropping from more than US$100 a barrel to less than US$50, that will further keep inflation in check. This is all good news for the stock market because inflation and stocks do not like one another. Inflation makes things more expensive and takes a bite out of corporate profits.

But the biggest beneficiary from the oil price drop is the consumer. Whether it’s the consumer in America, Europe or right here in Thailand, everyone benefits. By having to spend less on gas, the consumer now has extra money left over from their weekly paychecks.

It is estimated that the economies of North America, Europe and Asia will save anywhere between US$350 billion and US$500 billion due to the drop in oil prices. Last month in California, USA, one gallon of gasoline was US$2.50 a gallon down from US$4.25 in 2012. Even in Thailand to fill my tank costs one-third less.

This new-found money will go to fuel purchases of items such as cars, washing machines, TVs and other luxury items. Car companies will particularly benefit because consumers will buy more SUVs because of the lower gas prices. SUVs have higher profit margins than cars. This will boost profits at Ford and General Motors and take their share prices higher.

The one area short term where you don’t want to invest is in the oil companies. While no one can predict the price of oil, the fact remains that this price drop came about because of more supply than demand.

For the past six years, oil prices have averaged US$93 per barrel. This made every oil exploration project economically feasible. This included everything from oil sands to offshore drilling to Arctic exploration to shale exploration in the US. Oil companies and their investment bankers pumped billions of dollars into these projects. Now with oil below US$50, many of these investments are now underwater and that’s not good for oil stocks in general. Some companies will thrive and find ways to be more efficient and generate profit.

But even with this being the case, there are no signs that anyone is willing to slow down on pumping oil. OPEC is pumping at full throttle. So is Russia, Exxon Mobil, Chevron and every other major producer. They all need money and US$50 is better than nothing. The only way for prices to go back higher quickly would be for them to turn off the taps. I don’t see anyone willing to do that.

So, the question then becomes: how are investors to play this? There are several things investors can do.

One, investors want to stick with solid growth stocks like Apple and Facebook. Second, investors can play Ford and General Motors. Both stocks underperformed the S&P 500 last year and I look for a rebound this year. Third, as my readers and clients know, I like the Alerian MLP Index. With the increase in the supply of oil, the pipelines that transport oil will continue to benefit. Pipelines make money based on volume and not on the price of oil. This ETF also has a 6.48% dividend yield and pays a lot more than any of us are getting at Bangkok Bank.

Right now the best place for investors is the stock market. The average consumer is spending. I saw that on my last visit to the US where car dealers like AutoNation and CarMax reported strong sales. This is great news for the US economy. The drop in oil prices will only help keep this momentum going.

I know many are scared that they missed the boat, but it’s never too late. Take control of your finances and give me a call. I can help design a program that’s right for you based on your goals and requirement needs. Don’t wait another year and miss the opportunity of adding to your nest egg.

Don Freeman is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket, Thailand. He has more than 15 years experience and provides personal financial planning and wealth management to expatriates. Specializing in UK and US pension transfers. Call 089-970-5795 or email: freemancapital@gmail.com

— Don Freeman