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Clients will notice that we have recently reduced exposure to high yielding stocks such as the Banks, Telstra and Wesfarmers after a stellar year.
The attached notes explains our caution towards the now expensive defensives sector.
This note looks at the likely impact on economic activity, investment markets and Australia from Japan's earthquake and subsequent tsunami. The key points are as follows:
- The Japanese earthquake has caused terrible human suffering and our thoughts are with the Japanese people and all those affected.
- In the short term, the earthquake will likely depress Japan’s economy as a result of damage to factories, power supply, transport infrastructure and confidence. However, by the second half of the year the rebuilding effort is likely to result in a boost to growth.
- While it has added to short-term uncertainty in global investment markets, we don’t expect the earthquake to derail the global economic recovery or growth in Australia. In fact, increased commodity demand associated with rebuilding will ultimately provide a boost for Australia. We continue to see the recent pullback in share markets as a correction, and not the start of a new bear market.
Friday night saw the release of strong employment data in the US. There were 192,000 jobs created in February, following 63,000 in January and 152,000 in December.
This jobs growth over the past 3 months has pushed unemployment down to 8.9% from a recession high of just over 10%.
We have seen continued very strong economic data out of the US over the past 6 months, namely Manufacturing and Services Sector data and mildly improving retail sales. One of the last weak points was the stubbornly high unemployment rate, which now looks to be trending back down.
A spike in the oil price has historically had an ability to negatively impact the global economy. The most notable example being the Arab oil embargo of 1973 which among other factors contributed to a deep and prolonged recession.
To date, the current Middle East tension has had a relatively mild impact on the oil price. Libya accounts for slightly less than 2% of global oil supply. Saudi Arabia has the ability to pump more oil to cover any disruption and has commented that it is willing to do so.
So far the shocks to oil supply have been tiny. Libya’s turmoil has reduced global supply by only 1% in contrast to a decline of 7.5% during the 1973 embargo.
Of more concern is the potential for unrest to spread further throughout the region. The Middle East and North Africa (MENA) account for 35% of global oil supply and current events have shown how quickly unrest can spread. The Saudi Kingdom has announced spending of $36 Billion to appease its’ increasingly disillusioned citizens as any sign of instability would send panic through the oil market.
World Oil Price (WTIS) in $US - 5 Years
The above chart shows the peak reached in 2008 prior to the GFC, the recession induced collapse and the steady recovery over the past two years. The Global economy is again growing strongly and demand has pushed the oil price back towards US$100/bbl.
We believe that with above trend global growth forecast in 2011, the world can easily absorb the current oil price. World growth is far less oil intensive than in the 1970’s and the world now has greater stored reserves such as the salt caves in the south of the US which have only ever been drawn on during war and during the fallout of the recent natural disaster, hurricane Katrina. The generally accepted rule of thumb is that a 10% increase in the oil price will reduce global growth by approximately 0.25%.
We believe that the oil price would have to push through the previous peak of $US150/bbl to have a meaningful impact. The regions most affected will be throughout Asia and emerging markets that are already battling rising inflation and have heavily subsidised fuel prices.
We retain an overweight exposure to energy and are monitoring developments closely but do not believe that any major portfolio changes are required at this stage.
As always please do not hesitate to contact us should you wish to discuss current events and your portfolio in further detail.
The Team at FYM Financial
Patrick Boivin (born 1975) is a film-maker from Montreal, Quebec, Canada best known for stop motion short films.
He started his creative career by drawing comic books, and, in his words, ‘quickly discovered that it was faster to tell a story with video.’
He created the stop motion videos for the ‘King Of The Dogs’ by Iggy Pop and ‘Play boy’ by Indochine.
Many of his films have been viewed more than a million times on YouTube as has Iron Baby, which I’m sure you’ll enjoy!