Oil price up 5% on surprise cut by the Organization of Petroleum Exporting Nations (OPEC)

On 28 September, OPEC proposed a production cut to a range of 32.5 million—33.0 million barrels of oil a day (mbd), from 33.2mbd in August1. It’s a modest drop in numbers (which won’t come into effect until November), but the shift in direction and sentiment could be much more significant. What’s more, it underlines the stress that low oil prices have inflicted on OPEC budgets—particularly Saudi Arabia.

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Oct 11, 2016

According to an investor survey undertaken by JP Morgan Cazenove2, 82% of the 100+ investors surveyed expected no deal to emerge from this informal OPEC meeting in Algiers. The impact of the surprise announcement is clear in the Brent oil price, which was up 5% on 29 September from the UK closing price the previous day.

Oil producers account for over 11% of the UK FTSE All Share index3 (as of 29 September 2016). Adding in the other commodity sectors and related industries such as oil services and engineers that stand to move up with the rising oil prices takes this exposure to around 17%.

The UK equity market is benefiting from the news, up almost 1% by the end of the day with the oil and gas sector leading the charge, up over 5%3.

Oil price recovery gives a fresh boost to the commodity-exposed UK market

Many commentators saw the commodity-heavy nature of the UK market as a reason to be cautious last year when commodity prices were low and falling. In 2016, we have seen a significant recovery in most commodities (e.g. iron ore up around 30%; gold up 24%). Brent oil was only up 10% as at 29 September, but if the latest OPEC meeting is a sign of greater co-operation among OPEC members, there could be more to come.

So how are our funds positioned to capitalise on the oil price recovery?

JPM UK Equity Core Fund – A low risk way to share in oil price recovery

JPM UK Equity Core has a modest over-weighting to the oil sector. Much more important is the stock selection with overweight holdings in the exploration & production company Tullow Oil and the Oil Equipment Services companies Wood Group and AMEC Foster Wheeler. These stocks are more geared into recovering oil prices. As of 29 September, Tullow Oil was up 6.5%.

  • As a reminder, JPM UK Equity Core seeks to allocate the majority of its risk budget to stock selection which we see in the outperformance of Tullow, AMEC and Wood Group as at 29 September 2016
  • Consistent outperformance – 54 consecutive months of outperformance on a rolling three-year basis. The fund has outperformed every month on this basis since launch seven-and-a-half years ago in March 2009
  • Low cost – annual management charge of just 25 basis points (bps) and operating & administration charges of 15bps

JPM UK Equity Plus Fund – Active Extension to the oil sector recovery

JPM UK Equity Plus uses active extension to give investors greater exposure to our best long and short ideas. The fund is overweight Cairn and Premier Oil, as well as Tullow, with overweight holdings in stocks including the Oil Service Companies Amec Foster Wheeler and Wood Group. All of these names are outperforming the broader oil sector today and significantly outperforming the UK market.

Other underpinnings for the UK market

  • The UK market is not expensive, with a dividend yield of 3.8%, according to Bloomberg as at 29 September 2016
  • Sterling weakness is driving earnings upgrades
  • With over 70% of revenues coming from overseas, the UK equity market is an excellent play on the global economy

Callum Abbot is portfolio manager of the JPM UK Equity Plus Fund. Read more about the fund:

UK Adviser | UK Asset Managers

1Source: JPMorgan Cazenove as at 29 September 2016

2Source: JPMorgan Cazenove as at 29 September 2016

3Source: Bloomberg as at 29 September 2016

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Go to the profile of Callum Abbot

Callum Abbot

Portfolio Manager, JPM UK Equity Plus Fund , J.P. Morgan Asset Management


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John 6 months ago

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John 6 months ago