Except at the end of 2008, when the ongoing fallout from the Global Financial Crisis (GFC) hung like Damocles’ sword over the Australian economy, I can’t remember a year ending on a more pessimistic note since that tumultuous event.
But just as 2009 surprised us all with a share market rally – albeit of the dead-cat variety as it fell back sharply in 2010 – I have a sneaking feeling that 2015 might also prove the doomsayers wrong.
Right now that looks like a brave call. Since early November the share market has fallen about seven per cent, and for the calendar year it is under water.
No joy there. What has been a significant factor has been the poor performance of iron ore and how it has affected the two mining giants, BHP and Rio Tinto, with the former down more than 40 per cent since August and the latter down nearly 20 per cent over the same period.
Those falling share prices are a salient reminder that the investment boom in resources, which played a key role in getting us through the GFC relatively unscathed, is as dead as the proverbial dodo. Just in case the iron ore price (currently Australia’s biggest export earner) falling more than 40 per cent off its high is not evidence enough, then an Australian dollar trading closer to 80 than 90 cents provides the quod erat demonstrandum factor. Despite any assertion to the contrary, we unfortunately remain a commodity-based currency, especially in the mind of the RBA.
So where’s the silver lining? It’s summed up in three words – lower oil prices. It’s my contention that our market has largely focused on the negatives spilling over from a falling oil price without appreciating the significant benefits. Undoubtedly there are losers – just ask Russian President Vladimir Putin, Middle East sheikhs or even marginal shale oil producers in the US.
In the middle of this year, the price of a barrel of oil was touching on $US115; today it is closer to $US70 a barrel. I certainly expect oil prices to eventually stabilise at slightly higher prices than the current level, but producers earning more than $US100 a barrel will seem like something from dreamtime for 2015.
Lower oil prices mean one thing – lower energy costs, with all the positives that means right across the global economy. Economists predict this precipitous fall in the oil price will boost world growth by between 0.50 per cent and 1.0 per cent during 2015 – an excellent result.
And who will the major beneficiaries be? The big importers of oil – China, Japan and the US (despite it being a major shale oil producer), and they rank first, second and fourth [respectively] on Australia’s list of export markets, comprising more than half of our total exports of $331,184 million in 2013/2014. Our third biggest export market, South Korea, also will get a fillip from a lower oil price.
It’s been my strong contention that US growth, in particular, is stronger than most analysts’ expectations. And when you consider that oil at today’s price means nearly a US$1,000 annual saving for the average American consumer, then that added spending power will provide a further shot in the arm to an economy that is finally throwing off the shackles of the GFC.
At a macro level lower oil prices translate into lower inflation, which should give the US Federal Reserve the excuse it needs to delay lifting interest rates, although I expect they will start to nudge up the official rate by the middle of 2015 as the economy gathers momentum.
For Australia, a US economy back in stride will prove a boon, not so much because of what we sell directly to the US, but from the flow-on effect it will have on the major Asian economies with which our fortunes are now so closely interwoven. South Korea and Japan, in particular, will reap the benefits of a more prosperous Uncle Sam.
How this plays out in our sharemarket remains to be seen. But it is ridiculous that the Australian Westpac-Melbourne Institute Consumer Sentiment Index fell 5.7 per cent to 91.1 per cent in December from 96.6 per cent in November. It’s the lowest level since August 2011, and well below the average of 101.82 since the index began in 1974.
It simply doesn’t equate to the real economy with Australia’s GDP growth expected to average about three per cent next year, house prices have risen, NSW is powering along, and the economy continues to transition well from mining investment with a less-than-expected impact on the labour market. So perhaps the only plausible answer to all this uncertainty lies in Canberra – something for all politicians to ponder over the coming months.
George Lucas is managing director of Instreet Investment Limited. He has over 24 years’ experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products. He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.
