One of the greatest head scratching developments of last week was the US getting great job numbers and our dollar, not the greenback, goes up!
I think part of the reason is because we got record high building approvals in November, which adds to the picture that our economy is on the slow improve and so the chances of a rate cut reduces, and in turn adds, strength to the dollar.
But that’s my speculation. There are those who are arguing that the lower oil price will cut costs in China, which should help growth there and that will help the Australian economy, which also gives strength to the Aussie dollar. I have to confess that this analysis surprised me as I don’t think the oil pluses will help the likes of China until we’re further down the track. However against that we know foreign exchange and stock markets will move six months or more ahead of the real world.
What you need to know about oil
So it got me thinking about how I and therefore, we, should play oil. Here’s what you should know:
- Only 1% of employment growth for the US in the past four years has come from oil jobs and 2% if you want to stretch it to oil-related jobs, so oil’s price slump should not derail the global economy’s best news — the strength of the US economy. Experts say it should add about 0.4% to US growth that already looks to be heading to be above 3%.
- Only about 10% of stocks in the S&P 500 are hit directly by oil’s price fall and so 90% of stocks are not directly affected, so we should not be expecting an overall stocks slide because of oil. That’s another plus for the country and stock market that leads the world’s confidence and share price levels.
- The above arguments and the impact of lower oil prices on the costs of businesses worldwide and the income effects on consumers worldwide, should lead to company earnings upgrades — worldwide!
- The history of oil shocks and lower share prices coincides with demand problems but with the US surging and Japan, along with China, set for central bank and government stimulus programs, I’m not worried about demand. Europe is a more worrying issue and I hope on January 22 Mario Draghi and the European Central Bank delivers a credible QE program. That’s a huge watch for me, however, remember India contributes about the same to world demand as Germany and France combined. Furthermore, China plus the US creates eight times more demand for the globe than Europe’s two biggest economies!
- That said, the German central bank president, Jens Weidman, says the oil price slide is going to be a stimulus that means QE is less necessary. If both end up happening that will be a bonus.
- For us, the lower oil price is not good for our energy producers and we have plenty of them and related mining services companies. However, we are an importer of oil and that means our oil bill is dropping. It will also affect government revenue but there will be big positives for company bottom lines as costs drop and as consumers, armed with more disposable incomes, head back to the shops and buy more services. Company upgrades should outpoint downgrades and middlemen businesses, such as banks, should benefit until interest rates start rising solidly. That looks at least a year off. Also company tax collections should rise and help the Treasurer, Joe Hockey.
- Also don’t forget our two biggest export customers — China and Japan — and our rapidly growing one — India — are big energy users, so the cost-cutting effect there is not only good for them and the demand they have for our exports but also for us.
- Already in the US, Bloomberg is reporting that lower gasoline costs are resulting in greater car sales and it will happen here too as surely as night follows day.
A new direction?
As I write, our dollar has crept up to 82.21 US cents and it might suggest that my expectation that our dollar will fall to 75 US cents this year could be too excessive. If it doesn’t, the lost benefits of a lower dollar could be more than made up for from the huge pluses from lower oil prices and stronger growth from the world economy and our key export partners.
By the way, when the global economy kicks up, so do commodity prices — history shows us this — and that will help a few well-known Aussie companies.
And if this be so, the courageous contrarians who are buying energy companies — I like Woodside most because it pays good dividends — and material companies such as BHP and Rio, could be quite happy with themselves this time next year.
But, and this is an important but, if the likes of BHP and say Woodside or Santos don’t repay you in 12 months, it is more likely they will in 24 or 36 months. If you need to get returns in one year, don’t be a contrarian. You stick to our more conservative plays that we have recommended — banks and other dividend payers — but don’t squeal when other more risky companies bring bigger returns over the next couple of years.
So, what’s an easy way to play oil in 2015? Buy the index.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.