NZ oil theory grabs global attention

Sharemarket investors worried about the impact of soaring oil prices should look at the work of a Massey University academic, says Britain's Economist magazine.
A columnist in the magazine - which does not name its correspondents - said that Ben Jacobsen, a finance professor in Massey's commerce faculty, had developed a theory that shows changes in oil prices predict stock market returns around the world.

Professor Jacobsen and two colleagues, Gerben Driesprong and Benjamin Maat, both of Erasmus University at Rotterdam, said it took investors a while to work out the economic impact of oil-price movements.

They published the first draft of their work in October 2003, but Jacobsen updated it in February this year. Initially based on data for developed countries in 1973 - when the New Zealand economy was virtually gutted by the "oil shock" - Jacobsen and his colleagues found that oil-price changes and stockmarket returns were "linked but lagged". If oil prices rise, share prices fall, but a month or two later.

This pattern is clearest with biggish oil increases and in countries that are most dependent on energy.

"This, if true, suggests a genuine market inefficiency," the Economist said.

The study, "Striking Oil: Another Puzzle?", covered a 30-year sample of monthly data for developed stock markets, and revealed statistically significant predictability in 12 of 18 nations as well as the world market index. It produced similar results for a shorter period in emerging markets, including New Zealand.

"Investors seem to under-react to information in the oil price: a rise in oil prices lowers future stock market returns," the researchers said.

The magazine said economists argued about whether dearer oil provoked inflation, or recession, or both, and one theory was that shares and oil had been rising in response to common factors: buoyant economic growth and profits, and low interest rates.

But if investors worked on the alternative theory put forward by Jacobsen, an adjunct professor at Massey's Albany campus who is on sabbatical from Erasmus: "Expect shares to fall next month [July] - or at least fail to make the gains they would otherwise have made," the magazine said.

But it noted the bigger question was where oil and share prices would head after that.

Oil prices jumped in late 2004, then dropped, rose again in early 2005 and dropped again, and were now climbing again, reaching a record high of $US60.54c.

The Economist said the main surprise was how long it had taken share prices to fall in response.

The oil price rise certainly has so far failed to dent the New Zealand sharemarket - it rose 8 per cent in June, one of the biggest rises in the past five years.

- NZPA