The term ‘Dutch Disease’ is perhaps not as well known among investment circles as it should be. That’s because it has the potential to have a major impact on a number of the world’s economies, which could hurt the global macroeconomic outlook and slow down the progress of the FTSE 100 in 2015.
Indeed, ‘Dutch Disease’ is where a country is highly dependent upon one or more natural resources as a source of its GDP. Notable examples include Australia, Saudi Arabia and Russia, with the latter two being highly dependent upon oil and the former being dependent upon iron ore and other mining commodities. In Russia’s case, for example, two-thirds of its economic output is derived from the sale of oil and gas.
With the price of oil having fallen significantly over the last six months – from around $110 per barrel to its current price of around $75 per barrel – the income of the Saudi Arabian and Russian economies has fallen significantly. In fact, Russia is now forecast to fall into recession next year, with inflation set to hit 10% in the coming months and its currency undergoing its most turbulent period in over 15 years.
This fall in the price of oil means that the Russian economy is facing a highly challenging period in 2015. With a wide range of European companies operating in Russia, including oil companies such as BP, this is likely to not only hurt their bottom lines moving forward, but also damage investor sentiment in the stocks. As a consequence, European indices (including the FTSE 100) could be held back over the course of 2015.
Clearly, the sanctions being placed on Russia at the present time are also having a negative impact on the country’s economy. As with the low oil price, they are not expected to show any sign of abating in the near term, which means that things are likely to get worse for the Russian economy before they get better.
With the EU being the first trading partner of Russia, and Russia being the third trading partner of the EU, any deterioration in the Russian economy is very likely to have a knock-on effect on the European economy. And, with the Eurozone being on the brink of a recessionary and deflationary period itself, a weak Russia could be enough to push the single-currency region into recession, which would clearly hold back the performance of the FTSE 100 during the course of 2015.
Of course, it could be argued that this presents an investment opportunity. Indeed, for long-term investors there are a number of great value stocks on offer at the present time that could deliver excellent returns over the long run.
However, there will inevitably be a number of lumps and bumps during the course of 2015. Although the ECB’s QE programme could help to counter the effect of a potentially weak Russia, the FTSE 100 may remain highly volatile and, ultimately, be held back by the challenges faced by one of Europe’s key trading partners.