Market & Portfolio Update – November 2014

Global Shares
Global share markets recorded moderate gains in November, and despite a choppy time over the past few months, have gained 13% since this time last year. European markets helped drive November’s positive returns, rising 4%, with German shares up 7% on average. Despite overall growth levels being relatively flat, the level of spending from consumers showed signs of improvement while unemployment in Germany has held steady at record lows, in contrast to elsewhere in the Eurozone. During the past month the international price of oil has reduced significantly, with mixed effects on individual companies and countries around the world. However, on balance this is good news for consumers and most economies which are reliant on day to day oil imports (which we discuss in more detail in the article below).

New Zealand Shares
The New Zealand sharemarket posted yet another positive return for the month, making it the fifth consecutive month of gains. Like Australian and Global sharemarkets, some individual company returns were affected significantly by the fall in oil price. New Zealand Oil and Gas was down 14%, while Air New Zealand benefited from the lower price, returning 21% for the month. The New Zealand property sector performance was impressive in November, with property valuations continuing to be buoyed by relatively low interest rates. The electricity generators also continued their recent run of impressive performance, as both New Zealand and overseas investors looked to high yielding stocks to improve their portfolio returns.

Australian Shares
While the Australian sharemarket was significantly softer during November, this was isolated to resource companies and retailers. The decline in oil prices weighed on the energy sector with Woodside Petroleum, Origin Energy and Santos all recording declines over 10%. However the market found comfort in more defensive Healthcare and Telecommunications businesses, with both sectors up for the month. CSL drove the healthcare sector as earnings growth in the US continues to benefit from the falling Australian dollar, while investors seeking yield boosted Telstra’s performance, as expectations strengthened that the Reserve Bank of Australia will lower rates further in 2015.

Interest Rates
Global bond yields continued to grind lower as inflation remained low worldwide, particularly in Europe and Japan. The back drop of global stimulus is set to continue with the European Central Bank announcing the possibility of further monetary stimulus in the form of sovereign bond purchases and the Bank of Japan increasing its sovereign bond purchases from ¥30 trillion per year to ¥80 trillion per year.
Domestically, whilst many market commentators have drop the ‘Rock-star’ status from the headlines of the New Zealand economy, it remains on track for steady growth, albeit lower than earlier forecast by the Reserve Bank of New Zealand (RBNZ). During the month, loan-to-value restrictions were kept in place by the RBNZ, as Governor Wheeler remains wary of the housing market overheating. With the sharp fall in global milk prices and inflation below forecasts, the Official Cash Rate is expected to be on hold until at least the second half of next year.

Summary of Market Movements as at 28 November 2014

Share Markets

28/11

31/10

1 Month Return

3 Month Return

12 Month Return

3 Year Return (p.a.)

5 Year Return (p.a.)

NZX50

5,424

5,388

0.7%

3.9%

13.1%

18.4%

11.7%

ASX 200 (local)

46,188

47,741

-3.3%

-4.4%

4.3%

13.8%

7.1%

ASX 200 (NZD)

50,226

53,951

-6.9%

-7.0%

1.3%

6.7%

3.7%

MSCI (local)

3,419

3,316

3.1%

3.3%

13.3%

18.5%

12.4%

MSCI (NZD)

5,900

5,822

1.3%

6.9%

13.6%

16.0%

9.1%

Fixed Interest Markets

28/11

31/10

1 Month Change

3 Month Change

12 Month Change

3 Year Change (p.a.)

5 Year Change (p.a.)

NZ 10-Yr

3.91

3.99

-0.08

-0.16

-0.87

-0.12

-1.70

US 10-Yr

2.16

2.34

-0.17

-0.18

-0.58

0.10

-1.03

NZ OCR

3.50

3.50

0.00

0.00

1.00

1.00

1.00

Currencies

28/11

31/10

1 Month Change

3 Month Change

12 Month Change

3 Year Change (p.a.)

5 Year Change (p.a.)

NZD vs. USD

0.7851

0.7779

0.9%

-6.6%

-4.0%

0.3%

1.8%

NZD vs. AUD

0.9196

0.8849

3.8%

2.7%

2.9%

6.3%

3.2%

MSCI Weighted NZD

1.8%

-3.7%

-0.4%

2.5%

3.3%

Commodities

28/11

31/10

1 Month Change

3 Month Change

12 Month Change

3 Year Change (p.a.)

5 Year Change (p.a.)

CRB Index

254.4

272.0

-6.5%

-13.1%

-7.5%

-6.8%

-1.7%

Oil

70.2

85.9

-18.3%

-32.0%

-36.0%

-14.1%

-2.2%

Gold

1,175

1,172

0.3%

-8.7%

-6.0%

-12.4%

-0.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Summary of Market Indices as at 28 November 2014

Dec Update Graphs

How do lower oil prices affect portfolios?

After spending most of the past three years at around US$110, since June the price of a barrel of “Brent Crude” oil on the world market has fallen to around $70. With about half of the decline happening over the past month, this has had important flow-on effects for world markets.

Why the fall in the oil price?
The oil price is usually very sensitive to changes in demand, which itself is closely linked to the level of economic growth. While there are some signs that global growth has softened over the past few months, the overall level of growth has been relatively good. Rather, the main driver of lower prices has been from additional oil supply.
Oil GraphProduction from the United States’ “shale” oilfields has continued to grow, as a result of heavy investment in recent years, with recent output at levels not seen since the 1980s. At the same time, some of the supply risks from disruption in the middle east that prevailed earlier the in the year have now diminished, with production recovering in Libya for example. Sources: EIA, Haver Analytics, Deutsche Bank

How does the oil price affect world markets and portfolios?
There are some direct links between the oil price and worldwide market performance. Lower prices are clearly not good for oil producers, or companies that sell services to them, and this has been seen in earnings expectations (and share prices) falling for oil companies both here and overseas. At a nationwide level, countries that are heavily reliant on oil exports are also disadvantaged by the change - indeed in Russia, where oil products account for 70% of total exports, lower prices have had a bigger effect than the sanctions against its activities in the Ukraine. However, countries dependent on oil imports (particularly in China, India and South-East Asia) have benefitted. Within your Global Opportunities Portfolio, where we have included a small allocation to commodities to diversify portfolios as a hedge against inflation, the fall in oil has had some effect on returns, although mitigated by us taking the opportunity to reduce the size of the holding and lock in pricing when oil was over $105.

A win for consumers
For most of us, oil prices are an ongoing cost – and the same applies to consumers worldwide. In fact based on annual production of around 30 billion barrels per year, a $40 fall in the price equates to $1.2 trillion per year (around 1.7% of world GDP) being transferred from the pockets of producers to consumers. While this would not all flow directly into GDP growth, it nevertheless shows that lower energy costs should be a positive factor in supporting the world economy and consumers in particular, should lower prices persist. Oil Graph 2

Where to from here? Source: Capital Economics
While the fall in the oil price has been sharp, as always it pays to be careful in projecting forward the short-term past. A key factor behind the fall in oil prices has been that OPEC, the cartel of key oil producing countries, have maintained output levels rather than curtailing production to push prices back up. While the decision has not been unanimously supported, it potentially reflects an aim of pushing back at the new generation of shale oil projects in the United States, where costs are higher. Indeed, Citigroup analysis suggests that around 15% of projected oil production in 2020 would be uneconomic at current prices, while a significant portion of shale production would be under pressure should oil fall much further. Although good for established producers, this scenario creates some risks at the margin, including that debt issued by some marginal shale oil producers could come under pressure. Any direct effect of this on portfolios would be reduced by our actively favouring government bonds over corporate debt within global fixed interest allocations - while if prices remain low, then this effectively subsidises consumer spending growth worldwide.

Our previous newsletter emphasized striking a balance between investments to trade-off the risks and rewards of each. The potential headwinds and tailwinds to different parts of portfolios are a good example of this concept in action, and firmly support a diversified approach to portfolio construction over the long haul.

Summary of Key Portfolio Monitoring Decisions

Corporate Bond Portfolio

  • To replace the Auckland International Airport November 2014 bonds which matured during the period, we have added a 1.5% allocation to the Contact Energy May 2020 bonds and increased the allocation to Genesis Energy June 2020 bonds. With little issuance of new bonds in the market, these new allocations have helped increase the running yield of the portfolio.
  • Global Shares Portfolio – Rothschilds Direct Shares
  • Within the global shares allocation to direct holdings, managed in conjunction with Rothschild Bank in Zurich, we have diversified the portfolio’s holdings through five new additions, while removing some existing companies that have performed very strongly.
  • We have increased the portfolio’s allocation to the global technology sector through the addition of Telefonaktiebolaget LM Ericsson and a global technology exchange traded fund. We have also taken the opportunity to remove Microsoft which has appreciated over 50% since its addition in 2012.
  • In the healthcare sector we have removed GlaxoSmithKline and added Fresenius Medical Care. Fresenius are the largest integrated player in the global dialysis product and services market, caring for over 250k patients, and selling 45% of the world’s dialyzers and 55% of new dialysis machines purchased.
  • In the industrial sector we have removed old favourite 3M, given higher valuations from their significant outperformance of global markets in the past 3 years, and added Schindler Group. Schindler manufactures and installs elevators, escalators, and moving walkways internationally.
  • At a sector level we have increased the portfolio’s allocation to the US financial sector as the ongoing US recovery is seeing housing ramp up and increased levels of corporate activity. The portfolio has had exposure to this theme since July through Wells Fargo, and we added a US financials exchange traded fund to diversify and enhance this thematic.

 Article sourced from Grosvenor Financial Services Group Ltd

 

 

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