Daily Newsletter 14 Dec 2015 – Air NZ Flying High

5 January 2016

Last week global equity markets experienced their worst week since the sell-off in August. Markets
continue to be dragged lower by a rout across commodity shares, and in today’s we discuss the outlook
for oil and reiterate how we are positioned. In terms of events for the week, all eyes will be on the important
2 day US Federal Reserve Meeting which will conclude on Wednesday..



At The Minute insights
Air New Zealand Flying High

What’s causing the decline
Excess Supply: The additional supply from new entrants and relaxation in trade restrictions has hampered
oil’s performance. The removal of trade restrictions on Iran in July this year has been a major factor in oils
slide. Iran has added approximately a million barrels of additional oil on to the open market and its impact is clearly being felt.
US Shale Gas: Over the past 10 years the US has concentrated its efforts on developing an energy supply
alternative to crude oil. The introduction of shale gas as an alternative has meant that the US has
significantly reduced its reliance and therefore its net demand on crude oil.
OPEC: Organisation of the Petroleum Exporting Countries (OPEC) have been increasing their oil production to try and push smaller competitors out of the market. OPEC is locked in a battle of ‘game theory’ with other oil producing nations and is committed to driving them out of the market, seemingly at any cost. The low oil prices means high cost producers can no longer operate and therefore exit the market. Despite this method being painful for OPEC in the short run, they see it as a long term solution.
China Boom is Slowing: China was earmarked as the major driver of global growth over the next 10 years
and was expected to drive commodity demand. It has been growing at an astonishing pace with GDP growth of over 10%. However, recently this has not been the case. GDP growth has moderated to around 7% and there are now fears that the world’s second largest economy could slow further or even crash. believes a crash is unlikely. It can be expected that China’s growth moderates from its blistering 10% growth rate over time and 7% is by no means disappointing when compared to other developed nations.
Oil Outlook
Oil prices will recover when supply and demand rebalance, although we do not expect any major recovery
in the near term. OPEC looks set to stand its ground and is definitely not cutting back supply, so the
rebalancing will have to be done by pushing smaller oil producers out of the market (as prices will be too
low for them to run profitable businesses). While we have been seeing cut backs by the major oil
companies, our view is we could be well into 2016 before we see significant signs of rebalancing. For the
short term we expect to see oil remain under pressure.
Portfolio Positioning
Across our Australian and New Zealand portfolios we currently hold no pure play energy stocks, and
continue to avoid the sector
. In saying that, we are monitoring price moves for opportunities that are
arising in the current rout across commodity stocks. At the same time there are companies in Australasia
which are clear beneficiaries of a lower oil prices, such as the airlines which are large users of fuel. As
highlighted in today’s chart of the moment, one of these stocks is Air New Zealand which has been a string contributor to performance in our NZ portfolio of late.


Markets
Stocks have stumbled this month, proving so far an exception to a historical trend of a strong December
performance in global equities. As we mentioned last week we believe markets will grind higher as we head into the end of the year which is usually a quiet trading period. As we saw last week, when there are large declines in commodity markets equities tend to be dragged lower. However we remain positioned as we would under normal equity market conditions and do not believe the current market correction will be a broad long lasting sell-off.




Chart of the Moment – Air New Zealand (AIR) Takes Off


Five Things Markets Will be Watching this Week

1) The highly anticipated 2 day US Federal Reserve Meeting will conclude on Wednesday, we expect
the Fed raise interest rates for the first time in 8 years (Thursday morning Australia/NZ time).
2) In NZ, quarterly GDP figures are due to be released on Thursday which will provide insights into
the health of the NZ economy. The consensus is for annualised GDP growth of 2.30%.
3) Important European inflation and manufacturing data will be released on Wednesday and should
help provide the European Central bank with more direction as to its easing policies.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) More generally whether markets globally can reverse last week’s declines.

15-Dec

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