Bailout negotiations between the Syriza-led Greek government and Eurozone officials have featured prominently this week. A last-minute tentative deal was announced on Friday to extend Greece’s bailout for another four months pending a formal evaluation of the Greek government’s reform proposals, which in turn have been criticised by officials for their lack of detail. As a result, Greek Finance Minister Yanis Varoufakis and his team worked over the weekend to produce a revised list of budgetary measures for a review by Greece’s creditors, namely the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF). If officials are satisfied with the amended proposals, the bailout extension will be ratified. However, if doubts remain, it could prompt another meeting in Brussels later this week. German Finance Minister, Wolfgang Schäuble stated that Syriza will have a difficult time explaining the extension deal to their voters as it refutes Greek Prime Minister Alexis Tsipras’s declaration thaEurozonet that the bailout was “dead” along with the control of the EC, ECB and IMF, collectively known as the “Troika”.
Greek banks have experienced significant withdrawals recently and the hope is that, if approved, the bailout extension will avert an imminent bank run and sovereign bankruptcy. Interestingly, whilst the Greek stock market has been weak and extremely volatile, major international bourses have thus far been relatively robust. The FTSE 100 index, for example, has recently climbed close to its all-time high.
This week I am focusing on investment trusts in the UK Equity Income sector.
Since 2009, when the Bank of England cut base rates to 0.5%, income-producing asset classes have proved hugely popular with investors seeking a yield. The UK Equity Income sector, for example, has enjoyed share price appreciation of 210% over the past five years to date, outstripping the increase in the value of their underlying assets (NAV) by 8 percentage points. Consequently, the sector has become more expensive and had until recently been trading at a premium to NAV on average.
Following some share price weakness, though, the sector is now trading at an average discount to NAV of approximately 2%. Given that interest rates and inflation remain depressed, there does not seem an obvious reason for this. Indeed, Bank of England governor Mark Carney warned just last week that inflation in the UK could temporarily turn negative in the spring because of falling oil prices. He expects prices to rebound around the turn of the year but added that interest rates may be cut further if low inflation persisted.
So does recent weakness in the UK Equity Income sector spell opportunity? Possibly, but whilst UK Equity Income funds share a common goal, the processes implemented by their respective managers vary widely and have differing degrees of risk. It is therefore important that investors understand what they are buying as well as taking into consideration the price premia relative to the wider sector and the fund’s own history.
This week brought news that the oil price has registered seven consecutive months of losses for the first time. Since June 2014 the price of Brent Crude oil has fallen by over 50% from $112 per barrel to $53 at the end of January, reaching a six-year low in the process. While the price has recovered from a low of $43, investors are left wondering where the price of oil will go from here.
Bullish investors will tell you that major oil companies have been forced to scrap billions of dollars of investment programmes. The US rig count has fallen sharply on the back of this and this is an indication that supply will ease this year, helping to balance slack demand. There are also signs that demand may be increasing as consumption levels in the US have remained steadily high over the past month.
However, bearish investors have a case to say that the oil price may remain low. Despite the fact that the US oil rig count is falling, US domestic production is increasing, reaching a 31-year high last week. Some analysts have suggested that this is perhaps due to the fact that many scrapped rigs have come from low yielding operations. Therefore while the rig count looks to be falling sharply, the output remains steady.
Few investors seem to be predicting a sharp recovery in the oil price and with Nigeria increasing supply and Gulf producers remaining steady on their supply, this would seem a reasonable conclusion. For reference, the futures market currently has the price recovering to $70 per barrel in 2021.