Buy oil, hold gold, and watch Japan

Is now the time to buy oil? What about gold? And which overseas markets should investors be looking at? MoneyWeek invited six experts to dinner and asked them where they'd put their money now.

Merryn Somerset Webb: Let's talk about oil. The price has come off a bit recently but many still think there's a bubble.Is there?

Tim Price: I don't think so. The market sees bubbles everywhere these days, but I'm not sure they exist. Certainly not in oil. There's been no major oil discovery anywhere in the world for over 35 years and there's been no spending on infrastructure for oil-rig platforms and the like for years. So while the oil price could fall - say to $35 in the short term, I don't expect it to stay there. No, I think it's going to stay high and remain high. These oil-price rises aren't like the ones we saw, say, in the tech bubble: you can live without the latest XYZ operating system, but it's pretty tricky to live without oil - at least until someone finds a better way to ru a car.

Max King: This is a simple supply and demand story. Demand keeps going up and there isn't much new supply. And what there is at the moment isn't coming from big finds, but from small finds and better extraction techniques.

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TP: On the supply side, it's worth noting that we don't even know how much oil there is. No one trusts Opec anymore when it comes to reserves: production quotas are based on stated reserves, so all the Opec countries have an incentive to overstate them.

James Knowles: And demand isn't going down - to think it might reflects the arrogance of the first world. There are four billion people living in the emerging world and they don't like walking any more than we do. One day, they'll be using as much petrol as us.

Mark Slater: I have a bit of a bias against the idea of anything actually running out. Every decade people write about how this is going to run out or that is going to run out, but it never seems to. Still, there is no denying that over the last 20-25 years there have been pitiful levels of investment in resources, in oil and most other commodities, and that has to create problems down the road. It's like a drug company not investing in new drugs.

Dan Denning: Still, shorter term I'd be a little concerned about the oil price just because of the dismal growth numbers from Japan and Europe and worries that growth is slowing in the US. If the world economy isn't doing much, there's going to be a lack of upwards pressure on the oil price for a while.

MS: The interesting thing is that despite all the evidence there should be, there isn't yet a bullish consensus in the oil market. Right now, forward prices are lower than spot prices, which suggests that the market is still not convinced high oil prices are going to fall.

MK: But they might. That's what bull markets do. They don't go up in a straight line, they have set backs and shake out a lot of people. It's perfectly characteristic of any up-market.

MSW: A lot of the smaller oil companies are speculative, so if we agree investors should be steering clear of them, what should oil bulls be investing in now?

Justin Urquhart Stewart: I think the answer is not to go for the producing companies, but for those providing the extraction technology - the future is all about getting more out of each well.

MS: I don't think you have to choose between dull majors and speculative small caps. There are quite a lot of small and mid-caps in the sector that offer a bit of both. I like Sterling Energy, which is very prudently run and valued sensibly on the assets it already has, rather than on the basis that it might make a big find.

JK: That would be my top tip too.

DD: You also want to look at the wider energy market. As oil prices rise, people are going to try and find less costly ways to get hold of oil. So we're looking at electricity companies, such as Korea Electric Power - people who build transmission lines and the infrastructure of the transmission business.

TP: Uranium is another interesting thing to invest in. The West is going to end up being driven towards nuclear power just because it is the one non-fossil fuel energy we can actually produce now.

MSW: What about gold? You're a fan, aren't you Mark?

MS: Not particularly. I actually think base metals are more interesting - simply because people buy them for industrial reasons. There is a real demand for, and shortage of, things like copper and molybdenum, which is a by-product of copper, and the investment in base-metal infrastructure and mines by big companies over the last ten years has been even more pathetic than that in oil.

MSW: But your fund still owns gold stocks. Why?

MS: Because some of them are very cheap. I've got them for the same reason you'd buy any other cheap businesses without expecting their key product to rise in price. In fact, in general I think equities look relatively good compared with other asset classes. There are some good stocks around. Take BT. It's extremely fashionable to hate BT.

TP: Surely it's worth hating?

MS: No. The reality of that company is not bad. It's got a 5.2% yield and a p/e of 11 times, its balance sheet has been sorted out and while it's got enormous debt it's comfortable enough and its spitting out cash. But the key thing is that the management - who are very good - have a clear run for five years, the regulator can't touch them for that time. They can't say this, but here's the reality: if everyone wants this wonderful broadband network built, no one else is going to build it and BT aren't going to do it for nothing. It's a stunning thing compared with everything else and could easily surprise on the upside while the downside is very low.

JUS: I'd be wary of a lot of things in this market. There are some sensible concerns about where growth is coming from next. Companies are increasing dividends and doing share buy-backs, but are you hearing the statements about reinvesting in new capacity? That's the bit I'm not hearing - so where does the growth come from? Take that a step further and ask if economic growth is sustainable in the rest of the world.

MK: Well some countries might be slowing down, but not all. Taking a medium-term view you could see Japan and Europe picking up, for example, and emerging markets are growing very nicely.

DD: But that growth is very connected to US consumption, which is now slowing. And that could have a major effect on everyone.

MK: The story in Japan when it comes to markets isn't about growth, but that firms are raising their returns and capital, cash flow is improving, and profitability rising. And many of the small companies are paying dividends for the first time. There are also loads of companies in Japan with massive amounts of cash on their balance sheets and many trading at a discount to their cash. The big problem with Japan, however, is that there isn't any domestic buying, so it's hard to see what will make it rise much. You need domestic buying.

MSW: Do any other overseas markets interest you Max?

MK: A lot of countries in emerging markets are now better run than the developed markets. They have budget surpluses, large trade surpluses, large reserves, strong central banks and politicians who don't believe you can get something for nothing. That said, I think people are too hot on China and India, so I tend to prefer Latin America and Eastern Europe. In the last 30 years, Ireland has overtaken the UK, and I wouldn't be surprised if Eastern Europe doesn't overtake Western Europe economically in 25 years' time.

JUS: There are fascinating things happening in Asia. Take the rise of the consumer. When I was working in Jakarta a few years back, there were a total of seven shopping malls in Jakarta. Last Christmas when I went back, there were 72. Not filled with rattan hat for tourists, but premium goods for locals. Do not underestimate the power of the oriental consumer.

MSW: Has anyone got any specific tips?

DD: I like Valero. It's the largest independent refiner in the US and despite the demand for its services, the shares are still cheap on a forward-earnings basis

MK: I'd go for an emerging market trust - Templeton or Genesis, perhaps. I also like the Jupitus Split Trust, because it is highly geared and the manager's a far better stockpicker than I am.

TP: I think commodities are a bargain at the moment - this is a long-term buying opportunity. I've been a bit down on Anglo-American because of the Rand effect, but I think long term it's still a cheap stock. To get away from the Rand effect, I'd go with BHP Billiton, which I own - as do most my clients.

MS: A stock I hold in my fund is XM Checkout, which makes retail software for both retail businesses and pub companies. It's growing very quickly and is on about 11.9 times earnings. It's very well run and well financed and may soon get a massive contract with Punch, which will at least double, if not treble, their earnings - something that isn't in the forecasts. To me, that makes it a very exciting small company with either a good upside (without the contract), or a great upside (with it).