Weekly Buzz: 📈 Turmoil in the Middle East: How to deal with volatility

13 October 2023

The price of oil has been pulled from side to side lately: a supply cut from OPEC – the group of oil-producing nations – fed speculation of higher prices, while the threat of a recession-fueled drop in demand did the opposite. Now with new turmoil in the Middle East between Israel and Palestine, oil prices are taking the heat once again.

What’s happening with oil prices?

The Middle East accounts for nearly one-third of the world’s oil supply. Even if the conflict doesn’t immediately impact supply, any escalation that involves major oil-producing nations or sparks output cuts can cause volatility. So, concerned about the range of situations that could follow, investors have sent oil prices upward.

With countries around the world already facing low oil inventories, the mere idea of potential disruptions could keep prices high. And for major economies that are only just making headway against inflation, a rise in prices could partially reverse months of progress.

To add to the turmoil, the International Energy Agency (IEA) and OPEC, the two major players in the energy industry, have been sparring over the last week about the future of oil – with demand expected to plateau towards the year 2030. Savvy oil companies could keep supply tight in an effort to pull up prices and make as much as possible while they can, even as the world shifts to renewables.

As an investor, what does this mean for me?

Geopolitical risk is present around the world: Ukraine is still at war, and relations between the US and China are still tense. And volatility in the prices of assets and commodities, like oil, will always be present in the global markets. It’s better to acknowledge and account for this volatility with an informed, and consistent investing strategy.

What can help here is to take a long-term approach to investing – to brace for both volatility in prices, and emotions, when it comes to the decision making process. Dollar-cost averaging into a well-diversified portfolio, for example, can be a powerful investing strategy of getting into the markets over time, while keeping emotions at bay.

💡 Investors’ Corner: Why the biggest firms aren’t worried about high interest rates

The threat of ‘higher-for-longer’ interest rates has rattled the markets. And that’s probably fair: higher rates will cut into consumer spending and will make it problematic for smaller companies to get loans. And all of that is sure to slow the economy, a prospect that no firm is relishing. 

So, why aren’t the biggest companies sweating about elevated rates? To answer that, let’s take a look at the balance sheets (Jargon Buster below!) of the 18 biggest firms in the S&P 500.

Collectively, they have about $560 billion in outstanding debt. All that debt would be staring down higher refinancing costs, and would seem like a massive problem – if not for the fact that those same firms boast a whopping $680 billion in cash too.

What that means is that as rates have moved higher, they’ve received more income on their savings – enough to potentially outweigh any extra interest they might face on their debt. Basically, it’s like having more cash in the bank than the size of your mortgage.

We’ll stop short of suggesting that higher rates should be celebrated inside the boardrooms of big corporations. But when it comes to the direct costs of higher rates, these companies may be worrying a little less than the smaller ones.

This article was written in collaboration with Finimize.

🎓 Jargon Buster: Balance sheet

Essentially, a balance sheet is a snapshot of a company's financial health at a specific moment in time. It’s a comprehensive document that shows what the company owns, from its cash to its office computers, and what the company owes, like its bank loans. And the difference between the two? That's the company's net worth, or what’s left after all of its bills are paid.

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