This article is part of Morningstar’s Guide to Investing Ideas for 2015, our comprehensive round-up of where the most promising stocks, funds and markets can be found this year.
Emma Wall: Hello and welcome to the Morningstar series 'Ask the Expert'. I'm Emma Wall and here with me today is Morningstar's Dan Kemp.
Dan Kemp: Good morning.
Wall: Hello, Dan.
Kemp: Hi.
Wall: So I thought we'd talk about three investment ideas for 2015; red flags and opportunities. The first in the agenda is the oil price. This week it's managed to go below $50, the lowest since 2009. Is it something we should be concerned about? Is this an opportunity?
Kemp: Well, it could be both. From the concerned side, people normally look at the oil price as a harbinger for what's happening in the economy. If people are buying less oil, then the worry is that there is less economic activity. I don't think that's happening this time, which is a relief. What we're seeing in the oil price is perfectly normal supply and demand dynamics, it seems to be simply that OPEC who are the monopoly supplier are refusing to support a higher oil price, which is what they've done over the last few years and that's just bringing prices down to a more normal level, which might be very beneficial. As we as consumers benefit from lower oil prices that's similar to getting a tax cut, so people are more likely to spend.
Wall: And should we expect this theme to playout throughout 2015?
Kemp: It would be a fool who predicts where the bottom of this price move would be. Certainly, the Energy Institute in the U.S. is predicting that prices will rebound later in the year. I don't have much confidence in that predictions, I think we should just think about the knock on effects of a low oil price and how that can feed through to the wider economy.
Wall: And then one of the other things you wanted to flag to investors this year were valuations. What’s your view on this?
Kemp: Well, valuations are very high. They have been rising obviously consistent now for five years, that's a long bull market. We're not just seeing it in equities, we're seeing it in debt and other forms of instruments, particularly property as well. So, whenever asset prices are high, then investors should be concerned.
The margin for error is so much lower and so, as valuations rise, people should be more circumspect in what they're thinking about, be careful about following the herd. Eventually the herd will run off a cliff and you don't want to be part of that.
Wall: And that brings us quite nicely to the third investment idea of 2015, and that's to be contrarian.
Kemp: Absolutely. Contrarians tend to be quite lonely people. They have to take investment views that others don't share, but those tend to be the most profitable ideas. And when markets get to extreme of either optimism or pessimism that's when the best contrarian ideas emerge. And so if you have the stomach for it, investors should be thinking about some of those unloved areas; possibly energy – energy companies, for example, they've been hurt badly in the selloff. But even something like Russian securities; we all know the bad news for the Russian economy, but it's worth digging around trying to find some good news.
Wall: And if you're not confident doing that yourself, perhaps a value-orientated fund manager can do that for you?
Kemp: Absolutely. There are some great contrarian fund managers out there. They'll be the ones that have the wacky views, that's how you identify them. And having that discipline of taking those contrarian bets is something that sets those managers apart. And so if you don't want it to do yourself, then find a great manager to do it for you.
Wall: Dan, thank you very much.
Kemp: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
