The Ruble Weakens and Oil Slides12-17-2014 |
Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 12/16/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 12/15/14
The Ruble Weakens and Oil Slides
A combination of the western imposed sanctions and the steep decline in oil has caused the Russian Ruble to weaken to its lowest level vs. the dollar on record. As of the time of this writing it now takes 80 Rubles to purchase one dollar, putting additional pressure on Russian companies with outstanding dollar denominated debt. The amount of Russian corporate debt currently outstanding is estimated to be around $160 Billon according to Wells Fargo1.
In response to the falling Ruble, the Bank of Russia decided to increase their interest rates from 10.5% to 17%. This is often a move central banks will take to prop up the value of their domestic currency since a higher interest rate theoretically increases demand for the countries debt as investors seek to earn a higher interest rate. This interest rate hike is the largest since 1998, the same year that Russia infamously defaulted on its sovereign debt due to a confluence of economic circumstances not too unlike those we are witnessing today2.
What should be considered is how the factors hurting the Russian economy (i.e. the recent, dramatic fall in the price of oil) affect investments here in the U.S.. Of course it is no surprise the U.S. energy sector, as measured by the ETF XLE, has seen a major decline in price, as of Tuesday December 16 it has fallen 18.5% this quarter alone. What we at Hennion & Walsh Asset Management are focused on looking forward into 2015 is the broader implications of the decline in oil prices in the US.
Oil and Gas, as an industry, makes up significantly less of GDP in the U.S. when compared to the 16% it makes up of Russia’s GDP. Morgan Stanley’s Chief U.S. Economist shows oil and gas capex make up 9% of U.S. total capex which, in turn, make up only 12% of the U.S. GDP. So, while falling oil prices will have a significant effect on a growing and symbolic U.S. sector, it currently accounts for less than 1% of total U.S. GDP3.
What is yet to be seen is how oil and gas related jobs will be affected. The EIA reports that:
From the start of 2007 through the end of 2012, total U.S. private sector employment increased by more than one million jobs, about 1%. Over the same period, the oil and natural gas industry increased by more than 162,000 jobs, a 40% increase!4
As of the end of 2012 the oil and gas industry accounted for 569,000 U.S. jobs. Again, this is a relatively small segment of the approximate 96 Million employed persons in the U.S. but does represent an increasing amount of new hires and has certainly helped the unemployment rate decline since its peak in 2009.
The U.S. consumer accounts for nearly two thirds of U.S. GDP and consumer sentiment has important implications for stock prices. As the dynamics of the U.S. employment picture continue to change, so too will our reliance on different industries. Today we are becoming increasingly dependent on the energy sector and the individuals it employs.
When we at Hennion & Walsh Asset Management look for growth opportunities, we must consider how both international markets and commodity prices affect other asset classes. Building a diversified growth portfolio allows for investors to limit their overall volatility but can expose them to markets they may not fully understand. For this reason we have always suggested investors seek the help of a professional portfolio manager when investing for growth or in the equity markets. If you have any questions, or would like to learn more about how we are protecting client portfolios in this environment, please do not hesitate to contact your Hennion & Walsh Financial Adviser or a member of the Hennion and Walsh Asset Management team.
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