Vanguard experts discuss the economic implications of low oil prices

TRANSCRIPT

Noni Robinson
Noni Robinson
Noni Robinson: Joe, you said we don’t expect oil prices to rise dramatically over the next two years, so how will countries that export commodities be affected?






Joe Davis
Joe Davis
Joe Davis: Well, you know, clearly, the top of the list would be those [where] oil is their primary engine for growth. I think, first of all, [in] the U.S., we have seen, obviously, the negative imprint on the energy sector and in some areas such as Texas and some of the Dakotas, Alaska. But, by and large, why the job market continues to hold up is because [we’re] still a net oil importer; and hence, lower prices are generally positive for growth. That’s most of the developed markets, quite frankly, as well as China, the largest economies because, again, they’re net oil importers. But, it’s some of the emerging markets, [which] we went into the year just [being] very cautious [about] on a structural basis because of the amount of deleveraging that needs to occur. The rapid fall in oil prices is not helping economies such as the Venezuelas as well as some of the Brazils . . . and then parts of the Middle East, which, at least from a fiscal sustainability [standpoint], perhaps are in a better spot. So I think it’s important for investors to keep that in mind. Those economies that are highly reliant on oil or related commodity sectors and are highly reliant on external financing to service their debt are obviously also the areas, those equity markets that performed the worst over the past six months. I’m not saying that that’s through, but they’ve been beaten up pretty savagely and I think there’ll be repercussions for that. I think we do underestimate, not just the United States but also much of Europe, you know, as well as increasingly China, actually how diversified that economy is. In the same way, the portfolio can withstand some shocks when it’s diversified, those economies that are not reliant on one or two sole engines or industries actually tend to hold up in periods, you know, within reason, of volatility. I think we’re seeing that on the positive side of many developed markets. We’re also seeing that in a negative light for some, in this case, emerging markets [who are] very reliant on oil.

John Ameriks
John Ameriks
John Ameriks: I love that last point. Just to extend it a little bit further, I mean, Joe’s talking about the portfolio of industries that exist in a country, in an economy, and [that] having a diversified base is important. There’s an analog for investors. I mean, again, we spend a lot of time talking about oil. These are headline-grabbing numbers and changes, and everybody’s worried about how that affects the portfolio. Commodities, to the extent that we’ve used them at Vanguard, they’re used to diversify a portfolio. And we think about a broad base of commodities that do tend to behave very differently from time to time than the other markets, than stocks or bonds. And you’ve certainly seen that! They’ve diversified, all right! You know, last year was a terrible year for commodities inasmuch as it was a decent year for other asset classes.

Roger Aliaga-Diaz
Roger Aliaga-Diaz
Roger Aliaga-Díaz: And I think that the other place where that concept applies, too, is in thinking of the emerging markets as an investment tool. I mean, because of the same reasons we were talking about. They depend, some of them, [are] so concentrated on one particular commodity export versus others, like China, could be net importers, India, and others, right. That’s where having a basket of emerging markets as opposed to, basically, investing in one or two based on the growth expectation because, I mean, they are so dependent on those commodity prices that, that makes a much more volatile investment.


Important information
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
© 2016 The Vanguard Group, Inc. All rights reserved.