The key country beneficiaries of weak oil within EM are Thailand, Turkey, South Africa, India and China – the largest oil importers. Turkey imports more than 90% of its crude oil requirements. At $109 oil, its import bill is 5.7% of GDP. At $50 it falls to 2.6% of GDP. As most oil importing countries have operated in recent years with sizable current account deficits, improvements here will increase their macro stability. The more stable a country’s external financing position, the more cheaply it can attract foreign capital and lower inflation.

At the other end of the spectrum is Russia, the United Arab Emirates (UAE), Colombia and Malaysia, all sizeable oil producers and net exporters. Russia is facing especially serious consequences from the collapse in the oil price. At $109 oil, the country generates approximately $430 billion of oil export revenues. In 2013 this accounted for 16% of GDP. To offset the decline in oil revenues, the country has allowed the Ruble to fall sharply and this is having a significant negative impact on the economy.

A simple breakdown of the MSCI Emerging Market index shows that less than 14% of the countries in the index are net oil exporters. If we focus on the oil importers, we see that 70% of EM countries are sizable importers. The move in the oil price is thus clearly positive for EM in aggregate. However, the benefits of this decline won’t translate directly into a commensurate boost for consumption, many Asian countries enjoy a high savings culture and so spending will rise less sharply. Recent reductions in fuel subsidies in India and Indonesia mean that those countries recently experienced a net small increase in the cost of fuel (despite the fall in oil prices), so no boost to consumption is expected, however, the reforms are a clear long-term positive for those countries’ fiscal positions.

Consumer companies and possibly some financial companies in importing nations will also receive an important boost to their outlook. Elsewhere, the oil exporting countries obviously face significant pressures that will weigh on their domestic economies. But we are also cautious on the implications for other commodities and for companies with significant US$ debt. Within the industrial space, there will be some clear winners while those operating in industries with overcapacity will see the benefits transfer quickly to consumers.

Within the Global Emerging Markets strategy we have a clear preference for oil consuming countries and underweight oil producers such as Russia, UAE and Colombia. We are under¬weight the Energy and the Materials sectors. It should be stressed that there are several reasons for the fall in the price of oil. If it was supply driven, as mainstream commentators claim, it would be clearly positive. However, we do not believe it is supply driven and see other factors such as weaker demand and a rising oil price as more important. This reduces the positive benefit from the lower oil price.


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