Investors should prepare their portfolios for an even higher spike in oil prices, warns Colin McLean, managing director at SVM Asset Management.

The recent political uprisings in Tunisia, Egypt and Libya have caused oil prices to rise at an alarming rate, allowing little time for consumers to react, or even for companies to explain the impact on profits.  According to McLean, it won’t be till later in the year, as the results of the disaster emerge, that we’ll be able to determine which businesses can pass on costs and which will see profit margins squeezed.

The real shock may be yet to come as Saudi Arabia does not require a regime change for markets to panic.  In McLean’s view, weakness in the Saudi stock market and its banking shares already point to real fear and could potentially cause further spikes in oil prices.  Although ultimately deflationary, the early impact will add to inflation worldwide and could trigger a round of profit downgrades and a stock market setback, he says.

Industrial sectors, particularly capital goods manufacturers and engineers, could be hit the hardest.  The global economy is recovering, but confidence in capital investment is fragile and costs are hard to pass on.  The UK, a large energy importer, with plans for power generation lagging competitors, will be deeply concerned by a further spike in oil prices.  The US may prove to be less exposed to an oil price rise; to date, the oil price in the US has lagged, SVM believes.

Although markets have witnessed weakness in transport and industrial sectors, real assets, affording some protection against inflation, have held up better, the firm points out.  Oil producers, miners of precious metals and property have all been performing recently.  And, as expected with a pickup in inflation, bonds and fixed interest securities have been weaker.  SVM suggests that investors should be comfortable with their portfolio balance, and also look at liquidity in small- and mid-cap shares which could quickly fade.

The recent oil price rise has been much smaller than those that happened during the recessions of the 1970s and 1990.  In addition, today’s oil intensity is one-third lower than in the 1970s as there is greater efficiency and use of energy, and low energy sectors, like services, have grown.  That said, investors should recognise, however, that a spike higher could change everything, SVM warns.