Mob mentality rules

EVENTS in global equity markets at the beginning of last month paralleled those on the streets of England’s major cities.

Mob mentality took over from rational normality, leading to a frenzy of destruction.

On the streets, this manifested itself in horrific injuries to people and devastating damage to property.

Within equity markets, the result was a panic sell-off and massive destruction of value.

In each case, it could also be argued that “light-touch regulation” over previous years led us into both events.

Over the first 10 days of August, the FTSE100 index lost more than 13% of its value. Aggregate sub sectors, oil and gas producers and oil equipment and services fell even more, dropping by 15% and 18% respectively.

During such a sharp “risk-off” movement, one would ordinarily expect smaller listed companies to be worse hit than their larger counterparts.

Throughout the sell-off, however, all stocks seemed to fall in line, regardless of market capitalisation. For example, over the period in question, North Sea operator EnQuest fell by 18% – exactly in step with BG, which is close to 50 times its size by market capitalisation – with globally diversified assets further evidencing the wholly indiscriminate nature of the correction.

The decline in the exploration and production and services sectors were in line with the historic “beta” of each. This is a technical measure of share price movements relative to the wider market.

The oil services sector and oil and gas producers have high betas, and as such share price movements will amplify fluctuations in the wider market. There is a cyclical element to price movements in these sectors, tied as they are to expectations for global growth.

The global economy has gradually been recovering from the recessionary forces unleashed by the financial crisis of 2008. In the US, UK and eurozone,

governments remain constrained by the need to reduce deficits, and a recent run of disappointing macro-economic data prompted concerns that the recovery would stall.

This put pressure on expectations for corporate earnings, resulting in the share price reaction seen in early August. This rapidly warped into overreaction on the back of the US debt downgrade, and some avoidable policy errors in Europe.

Oil prices at $120 per barrel or above can act as a brake on economic growth, particularly in developing markets.

Supply disruptions from the US moratorium on deep-water drilling and from the Arab Spring revolutions have kept prices elevated. At the time of writing, however, Brent now sits at around $100 a barrel; a level less prohibitive to expansion in these areas.

I continue to believe that while recovery among western economies may remain anaemic, sufficient expansion will be seen in Asia and emerging markets to avoid global economic contraction.

If market expectations come to reflect such thinking, some semblance of normality should return to share markets. As I have commented previously, if an investor has researched an opportunity in detail and has committed to an investment case, then short-term, sentiment-driven volatility should not deter him from his goal.

Having been absolutely hammered on the way down, it would not be unreasonable to expect exploration and production and services stocks to rally sharply upwards, should broader sentiment towards equity improve.

In times of volatility, panic selling profits no one, and those who capitulate often live to regret it. As Offshore Europe kicks off, Samir Brikho, chief executive of Amec and conference chairman for 2011, will invite delegates to come together on the theme of “securing safe, smart, sustainable supply”.

Organisers are expecting the biggest turnout yet seen in the history of the event: a sign of confidence in the energy industry which is very welcome and very timely given the febrile behaviour of markets last month.