Oil funds bounce back but respite could be temporary

By NEIL RIDDELL

AFTER ill fortune on the money markets throughout much of 2008 recent weeks have seen a significant upturn in the value of Shetland’s oil reserves, which have regained almost £40 million of the funds lost as a result of the economic downturn.

As of 2nd January the council’s reserves had a market value of £234.7 million, up from a low point of £208 million in mid-October, while Shetland Charitable Trust’s investments had recovered – albeit at a lesser rate – by around £10 million to £158 million over the same period.

It is a rare piece of good news for the funds, which have taken a hammering over the past 12 months, though both the SIC and the charitable trust urged caution at the news, as both take a long-term view of the investments and are all too aware that gains in recent weeks could easily be washed away again.

The latest figures mean the community’s oil reserves total just over £393 million, significantly lower than the £483 million a year ago before the global financial crisis began to take hold, but it is not clear whether the recent upturn is a temporary reprieve or the signal of better things to come in the months ahead. It still leaves the council’s reserves some way below the £250 million floor policy which the SIC is committed to maintaining, but head of finance Graham Johnston has repeatedly said that any re-evaluation would only come after the year-end balance sheets have been calculated on 31st March, which is the value against which the policy is measured.

He said this week that it was impossible to say what the stock market’s fortunes would be in 2009, with analysts “at a loss” to predict what is going to happen and estimates for the FTSE index – currently standing at 4,579 points – ranging anywhere between 2,500 and 6,000 points in the next year.

“I’m at sixes and sevens as to what I think is going to happen,” Mr Johnston said. “The analysts are all at a loss as well. It could be that the bad news is all priced into the market . . . whether this is the green shoots of recovery or just a temporary phenomenon, I have no idea. It’s very difficult to judge at this stage, but a better way to start the year than the way we ended it, certainly.”

Most financial analysts foresee a grim outlook for the duration of this year, with the looming spectre of a prolonged recession and the likelihood that the economy will not start to recover until well into 2010, but despite declining economic activity and rising unemployment across the UK some are now suggesting that the stock market hit a low towards the tail end of last year and is likely to perform more robustly this year.

Shetland Charitable Trust financial controller Jeff Goddard also welcomed news of the funds’ recovery but was not getting carried away.

He said: “It’s good news for a change [but] I would caution that having said we are looking at the long term when things were bad, we shouldn’t read everything into two or three months of reasonably good news.

“There are reasons to hope that things won’t get any worse, and that they will continue to get a bit better, but it is far too soon to talk about a wonderful sustained recovery. Starting from a low point, there was always going to be some sort of bounce back [though] I’m not convinced that we won’t have another fall. There’s always uncertainty, but [analysts] are more aware of the fact that they don’t know what they’re talking about.”

Both Mr Johnston and Mr Goddard have both consistently advocated a policy of “riding out the bad times” and waiting for the oil funds to regain their value, with the overwhelming political consensus being that it would be foolish to cut and run from investments when the market is at such a low point, a strategy which has served the community’s reserves well for several decades.

There was better news, too, for council workers’ pension fund which has recovered to £161.9 million, having slid to £138 million in late November. Twelve months ago the fund – which is more heavily dependent on the fortunes of the stock market than the charitable trust investments and the council’s reserves because a larger proportion is invested in shares rather than bonds – stood at £214 million.