Written by Bianca Hartge-Hazelman, Sydney Morning Herald. Clime Asset Management’s Chief Investment Officer, John Abernethy was interviewed for the following article, published in Business Day, Sydney Morning Herald on 12 January 2015.
Investors are bracing for more turbulence in financial markets, with further falls in oil prices expected and uncertainty to linger over the future of indebted Eurozone nations, and the United States’ gradual move towards higher interest rates.
Australian shares are tipped to fall 0.7 per cent when trading resumes at 10am AEDT on Monday, according to the SPI Futures. Weighing on market sentiment was Friday’s selloff on Wall Street as investors honed in on news of weaker wages growth that overshadowed a stronger-than-expected jobs report.
Worries about the upcoming Greek election and political instability, coupled with anaemic growth in Europe and Japan, also weighed on the minds of traders.
Brent crude dipped below $US50 ($61.50) a barrel for the first time in five years, prompting many fund managers to cite oil price weakness as one of the biggest risks to asset performance in 2015. The price of Brent crude was trading at $US50.11, down 1.68 per cent, on Friday, while West Texas Intermediate traded at $US48.36, down 0.88 per cent.
“A falling oil price increases the risk of European deflation, hurts the oil sector, and also increases geopolitical risks of key oil producers in the Middle East, Russia and South America,” Clime Asset Management chief investment officer John Abernethy said.
Bond yields have started this year generally lower, reflecting expectations that the falling oil price will weigh on inflation, particularly in the world’s biggest economy.
“The more bond prices rally and yields fall, the more likely we will get a correction. Asset prices never head in one direction without a correction and European bonds have clearly rallied too far and for too long,” Mr Abernethy said.
In the week ahead, US producer and consumer price inflation readings for December are due on Thursday and Friday. Weaker energy prices are expected to push CPI inflation to just 0.8 per cent year on year and core inflation is likely to remain low at 1.7 per cent year on year.
Such a result will help to delay the case for the Federal Reserve to raise interest rates any time soon.
The big economic item for Australia this week relates to jobs. Reduced employment growth is expected in the December data and the unemployment rate is likely to tick higher, which could add to the case for a rate rise by the Reserve Bank of Australia this year. The official cash rate remains at 2.5 per cent.
The Australian dollar is up slightly at US82¢ against the greenback as the US economy strengthens and so, too, does the appetite for US-dollar assets.
The US December-quarter profit-reporting season also kicks off this week with Alcoa, JP Morgan and Intel all due to report. Consensus expectations are for 2 per cent growth in profits during the year to the December quarter.
In Australia, and in global markets, energy companies were hard hit by falling oil and metal prices in 2014.
Indeed, AMP Capital chief economist Shane Oliver warns the oil price collapse is likely to be a big negative for energy producers for some time yet.
“It’s reasonable to expect some sort of blow up there, but it’s unlikely to cause major systemic problems globally or in Australia and more broadly, the stimulatory impact of the 50 per cent fall in oil prices over the last year on global and Australian growth, likely to be around 0.7 per cent, is expected to ultimately dominate.”
In an interview with Bloomberg, Karoon Gas Australia director Robert Hosking played down the impact and said it wasn’t all bad news for oil explorers. He noted that as the oil price falls so, too, is the cost of drilling rigs as the market adjusts.
World stock markets have experienced a shaky start to 2015. Last week, US shares fell 0.6 per cent, Eurozone shares dropped 3.1 per cent and Japanese shares dipped 1.5 per cent.
Chinese and Australian shares managed to edge higher. The benchmark S&P/ASX 200 rose 0.55 per cent to 5465 points after finishing 2014 up about 1 per cent in the 12 months to December 31.
Mr Abernethy said opportunities still existed for investors in quality, high-yield-producing companies such as Telstra, Woolworths and the big four banks.
“Investors should also continue to maintain cash, despite low yields, which will position them to re-enter the market should something ‘break’ and global markets experience an overdue painful shock.”
In Europe this week, the focus will be on the European Court of Justice’s opinion on Wednesday on the ECB’s Outright Monetary Transaction sovereign bond buying program.
Chinese export and import data will be released on Tuesday and expected to show a slight improvement for December.