WITH oil prices having seen much gains in recent weeks as a result of the Russia-Ukraine war, there are worries that a full-blown recession – often a result of high oil prices – is on the horizon for most economies.

       Strong crude prices tend to correlate with recessions as they impact the prices of consumer products like gas and food and curtail consumers’ spending power.

       “When a higher-than-usual amount of money is spent on something, it is often at the expense of other things, and consumer spending and confidence are a huge part of any economy,” remarks an observer.

       Recessions, as we know, are never good for any stock market.

       But are strong oil prices a boon for energy-related stocks?

       The simplistic answer to this is yes.

       To be sure, crude oil has lost some of the gains it has been chalking up since news on the war broke out and stoked supply concerns over the commodity.

       In fact, it has been on a wild ride over the past few weeks, being the most volatile it has been in the last couple of years.

       For instance, on Wednesday, the global benchmark Brent crude saw its biggest daily fall since April 2020. Two days earlier however, it recorded a 14-year high, reaching over US$139 (RM583) a barrel.

       Notably, Russia is the world’s third largest oil and gas producer.

       Over on Bursa Malaysia, the Bursa Malaysia Energy Index, which tracks oil and gas stocks, is down year-to-date, falling 16.7 points to 717, after some gains in between.

       No ‘buys’ yet

       In such a scenario, fund managers are not advocating “buys” just yet.

       Value Partners Group Ltd co-chairman and co-chief investment officer Datuk Seri Cheah Cheng Hye notes that consumers all over the world are getting hurt badly by inflation, and Malaysians are no exception.

       “The so-called “negative wealth effect” on ordinary Malaysian households and salary earners is creating genuine hardship and is bad for financial markets,” he tells StarBizWeek.

       “A defensive investment strategy is recommended.”

       He notes the current military conflict in Ukraine has turned the inflation picture from “very bad to even worse” with supply chains in energy and food further disrupted.

       “Most energy and commodity stocks already reflect rising commodity prices, and I wouldn’t recommend chasing such stocks unless you are just targeting short-term gains,” the Hong Kong-based fund manager says.

       “Sooner or later, the fighting in Ukraine will stop, and we may then see profit-taking in the energy sector. So, a new buying opportunity could emerge once the sector corrects,” Cheah adds.

       He says the biggest challenge for long-term investors is how to keep ahead of inflation.

       “Inflation in the US is running at 7.9%, the highest in four decades, and sharp rises in prices have become a global problem.

       “As a producer of oil and gas, as well as palm oil and other commodities, Malaysia benefits from rising prices but the real benefits are limited,” he notes.

       On the whole, Malaysia is a food importer and depends heavily on global markets for its manufactured exports, Cheah says.

       “Although the government will try to support people’s livelihoods through direct and indirect subsidies, the “trickle down” effect of higher oil and palm prices for ordinary Malaysians is quite limited.”

       Cheah says for Malaysian investors looking to diversify, Chinese stocks could be an attractive option.

       “By exercising tight social and financial discipline, China still has room to cut its domestic interest rates while other countries around the world are being forced to raise rates to fight inflation.

       “Chinese stocks have been falling after the government tightened regulations on business activities but now the government has changed its emphasis to stimulating economic growth,” Cheah adds.

       Fortress Capital CEO and fund manager Thomas Yong says oil & gas companies would certainly benefit from high oil prices.

       Fortres Capital Thomas Yong

       “However, most companies would only benefit at a later stage when projects are rolled out. The ones that immediately benefit are upstream companies as well as those with exposure to higher petrochemical prices,” he tells StarBizWeek.

       “Having said that, one should be cautious on short-term trading due to the high volatility of oil prices caused by the uncertainties of the ongoing war and sanctions.”

       Yong, who manages close to RM1bil in assets says he has not bought or sold any energy stocks since the war broke out in February, and his current portfolio is made out of less than 10% oil and gas shares.

       “We think that recovery from the pandemic is intact with better vaccination rates, and economic growth should be stronger without falling back into movement restrictions.

       “We have positioned our portfolios into reopening and recovery plays such as financials, food & beverage, retail and tourism-related stocks,” Yong says, adding that he also likes selective technology stocks, especially after the recent price corrections.

       Former investment banker Ian Yoong Kah Yin notes that any surge in oil price and ensuing higher energy costs will adversely impact the Malaysian economy but the impact will be less here compared to other economies as the country is a net exporter of oil.

       “There is a high probability that a global recession will happen in the second half of this year.

       “The Malaysian economy will not be an exception,” he says.

       When discussing beneficiaries of a strong crude price, Yoong, who is an active private investor, points out that it is best to be specific on which subsector of the oil & gas industry actually looks most promising.

       “The oil and gas sector has been in the doldrums since 2014 because of low oil price and the advent of renewable energy.

       “Fossil fuels were taboo as they were portrayed as the main culprit of climate change and there was little investment in this industry.

       “Petronas’ upstream capital expenditure tapered off to RM14.6bil in financial year 2020 (FY20). It however picked up to RM17bil in FY21 and went up further to RM20bil in FY22.

       “This could increase to RM25bil in FY23. The good part is that it is unlikely to decline in the medium-term.”

       Yoong feels that the share prices of oil and gas companies (with sound balance sheets) have yet to factor this in.

       “However, the best sub-sector comprises companies that will benefit directly from a global oil price increase rather than the capital cycle of our national oil corporation.”

       On the way he is managing his portfolio of investments currently, Yoong says he is adopting a wait-and-see approach until the end of 2022.

       “The temptation is great though, as there are a few well-managed small mid-caps trading at attractive valuations.

       “But we are in a global conflict and this is the source of great uncertainty. The economic and political ramifications extend far beyond the war zone in Ukraine. Will this escalate? Therein lies the great uncertainty.”

       The year 2020 was a bumper year reminiscent of 1993, he says.

       “It was an advantage to be margined. This year is the equivalent of 1995 and 1996. The aftermath of the gigantic retail rally. The aftermath of any rally is usually ugly.”

       Yoong says his portfolio is in a net cash position at the moment.

       “I did not anticipate the Russia-Ukraine war.”