Sell oil, buy banks?

Sell oil, buy banks?

It's a superpower confrontation in a region criss-crossed with oil pipelines vital to the west. So why, amid normally feverish speculation on London and New York markets, did the oil price continue its fall despite Russia's army marching through Georgia?

Over the past month, the price of Brent crude has fallen 24%. Meanwhile shares in banks, shattered over the past year by the credit crunch, have started recovering. Barclays and HSBC have jumped 30%-40% from lows. Even housebuilder Barratt has tripled in price in three weeks afer an initial battering from falling house prices.

What's going on? Is the great credit crunch trade - in which shares in energy, commodity and emerging market stocks have soared while financials and western consumer stocks have sunk - now over? Will, as some predict, the oil price now track back below $100? Or is this a blip before we stagger into credit crunch part two, as Europe follows the US into recession?

According to Merrill Lynch's monthly fund manager survey, a closely-watched barometer of sentiment among the people who really control the London stockmarket, a tectonic shift is happening.

The net number of fund managers who were overweight in oil and gas fell sharply in July from 52% to 11%. Meanwhile the number underweight in banks pulled back from 57% to 40%.

Bill Mott, of Psigma Income, is a leading fund manager who in July, days before oil started falling and banks started rising, declared we.....continued below

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were at the biggest "inflection point" in markets for 25 years.

But unlike Merrill Lynch, which thinks the swing back to bank stocks is overdone, Mott believes UK consumer and financial stocks represent fundamental value, while the commodity/emerging market theme is history.

"The bullish argument from those still buying into commodity stocks is that long-term demand for natural resources from emerging markets (e.g. China and India) is going to drive up endlessly the price of those commodities. However, it is also the potential case that these price rises will put pressure on inflation rates everywhere and, with western central banks hawkish on inflation, that will cause over-indebted western economies to be plunged into recession or stagflation.

"The mindset is almost as extreme as 'companies which are close to the consumer in the UK, US and Europe etc will never be able to make decent returns again.' Meanwhile, natural resource stocks make up close to 40% of the weighting in the FTSE All Share Index. Tracker funds are becoming pseudo-natural resources funds. The performance of UK equity income funds has been dominated by how much the fund manager has dared to have in natural resources."

It's an argument that has won Mott a significant backing from investors who have poured more than £400m into his Psigma fund over the past year. Critics point out Mott first started telling investors banks were cheap last September, since when most have halved in value despite a recent bounce.

Britain's most successful "value" investor, Neil Woodford of Invesco Perpetual (who runs more than £12bn in his Income and High Income funds), isn't impressed by the arguments for banks. He says: "I do not feel impelled to dive into the bank sector at all because there is much more value on offer elsewhere in the market."