November was a tough month for the Australian share market, with the market down 207 points or 3.8% to close at 5,278 points. For the financial year to date, our market has tracked sideways, down 1.6% for the financial year in capital terms and up 0.3% when dividends are included.
Significant weakness in the oil price was the catylist for November’s share market weakness, with oil free falling from $US86 a barrel down to $US70 a barrel over the month, a fall of 18.5%. Oil has continued to fall in December and is presently trading at $US63.82 a barrel at the time of writing.
As per the chart of the oil price below, the current sell off is the largest, other than during the GFC period in 2009, for the last 20 years.
The weakness in the oil price has stemmed from OPEC, the organisation of petroleum exporting countries, electing to maintain its output quota in the face of rapidly expanding oil production from US shale oil producers, who have experienced significant production growth in recent years.
A low oil price is viewed as being detrimental to energy exporting nations and shares in energy companies have been hit hard including Australia’s oil majors which have fallen significantly since the beginning of November. At the time of writing, BHP is down 14%, Woodside 15%, Santos 46% and Origin 25%.
Overall, we ultimately view current weakness in the majors as a buying opportunity. While impossible to predict where the bottom will be for oil and other commodity prices, the falling Australian dollar will provide some protection against weak commodity prices. In the main, our majors are low cost producers, Australia is well positioned for the markets we supply with scope for new markets such as India to emerge and world growth will one day improve. Commodities have and always will be cyclical and at some point, even if years away and if only due to a reduction in supply as high cost producers curb production, there will be a price recovery.
Morningstar’s timely BHP research piece suggests that at current prices BHP should be purchased for income, with the likelihood of a cut to the current 4.8% fully franked dividend yield unlikely.
While the falling oil price has resulted in share market weakness in recent times, longer term, a weak oil price will be positive for global economic growth. With a surprise interest rate cut in China, Japan in recession and anaemic European economies slumbering, world growth needs all the help it can get.
Following the lead of weak iron ore and oil prices, the Australian dollar has also fallen and at the time of writing is below 83 US cents, a 5 year low. However, as per the chart below, while the Australian dollar is down 9% against the US dollar, it has held up reasonably well against other currencies over the last 12 months.
The reality is that the US currency is appreciating against all currencies. While America may soon become unaffordable for Australian travellers, the rest of the world remains relatively affordable.
The strength in the US dollar can be attributable to the relative strength of the US economy, when compared to the rest of the world. This strength was highlighted in the November jobs report announced last Friday, where US employers added 321,000 new jobs across all sectors of the economy and the jobless rate remained at 5.8%. These positive employment numbers saw the US share market make a new record high, with the Dow Jones hitting 17,991 points. This strength further adds weight to the argument that US interest rates are set to rise next year, with current market expectations for interest rates to rise towards the end of the year.
This contrasts with Australia, where market expectations for an interest rate cut next year are increasing as confidence in the strength of the Australian economy deteriorates and lower commodity prices diminish both Federal and State Government revenue and increase budget deficits.
We take this opportunity to wish everyone a safe and enjoyable festive season and may the second half of the 2014/15 financial year be more prosperous than the first!
GENERAL ADVICE WARNING
Please note that any advice provided is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. Opinions, conclusions and other information expressed in this email are not given or endorsed by Horizon, unless otherwise indicated. Therefore, before you act on any of the information provided in this email, you must consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and if necessary, seek appropriate professional advice.