Myddleton Croft: Oil and gas sector could be a good bet in uncertain times

Carolyn Black

Carolyn Black

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As summer draws to an end and the evenings begin to darken, what lies in store for investors after an unexpectedly strong summer period for some of the UK’s biggest companies?

We fear it may not be just the leaves on the trees that begin to fall as autumn sets in – the stock markets, interest rates and even the pound have all been tipped to fall once attention turns back to business after the summer break.

Since the European Union Referendum at the end of June, the UK’s policy setters have concerned themselves with preparing the economy for a slowdown which has, in some areas, already begun. The Bank of England’s move to extend its monetary stimulus through more quantitative easing (QE) and a reduction in interest rates to 0.25 per cent, has almost certainly provided a boost to the more defensive areas of the stock market and, as such, many stable blue chip stocks now appear expensive.

We are rather cautious about the recent strength of the UK markets as we are all too aware that discussions with the European Union concerning the implementation of Brexit have not yet begun and Article 50 has yet to be invoked. There is the potential for plenty of disruption once talks commence, with some of the highly valued stocks getting hurt along the way.

The bond market is also worthy of comment, with prices of government bonds and quality corporate bonds reaching historic highs as QE is stepped up, whilst yields are languishing at all-time lows – not a helpful situation for investors seeking income! There is a chance that UK interest rates could be forced lower still, though we do not expect to experience negative interest rates here, as is the case in Japan and Europe. In a low interest rate environment, we see little in the way of upside for bonds and other ‘risk free’, ‘safe haven’ assets and fear that these investments could offer investors ‘return-free risk’ over the medium term.

So, where are we investing against this unprecedented backdrop where neither the stock market nor the bond market is offering investors any value? One area that looks fundamentally interesting is the global oil and gas sector. We believe that supply and demand forces could come back into balance over the next few months, which should lift the price of oil, and associated investments.

Whilst the last few weeks have seen some weakness in the price of crude oil, it does seem supported near these levels and with improving supply/demand, a better outlook seems likely over the next year. Perhaps a seasonal play to consider as you pack away your summer wardrobe!

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