Falling oil price good for Kiwi investors

Oil prices fell dramatically over the second half of last year, from $115 per barrel in the middle of the year to less than $60.

That’s led commentators to suggest looming problems for fixed interest investors who have turned to junk bonds - such as in US shale gas and oil companies - in a search for yield.

At the end of October last year, debt issued by energy firms made up 15% of the Barclays US High Yield Index, compared with 5% in 2004.

Those companies will struggle with the lower oil price and it has been suggested a wave of defaults could have a knock-on effect to the rest of the market.

But Christian Hawkesby, of Harbour Asset Management, expected a lower oil price to be a positive thing for New Zealand and other developed markets.

He said few investors would have direct exposure to oil investments but would be affected via their equities and fixed interest portfolios, where there would likely be winners and losers on a country-by-country basis.

Economies of countries that are producers of oil will fare worse than those - primarily developed markets - that are net consumers of oil.

Equities in those consumer countries will get a lift as shoppers with more money in their pocket after filling up their vehicles give the economy a boost.

That effect is already being seen. While US oil and gas stocks lost 30% of their value over a month at the end of last year, the airline sector was up 8% and retail sectors such as home entertainment lifted 9%.

"For fixed interest, it's a question of whether the falling oil price has an impact on inflation and what the central banks will do," Hawkesby said.

He said it was likely the oil price slump would push the ECB towards quantitative easing.

Hawkesby expected the price drop to be a positive thing for countries such as New Zealand and the United States.

But emerging markets would struggle. "If there are risks to watch in 2015 around the central case 'good news' story for developed countries, they are likely to come from emerging market strains causing wider geo-political disturbance."

Comments from our readers

On 12 January 2015 at 2:10 pm Brent Sheather said:

With due respect this sounds a bit like the sort of “all news is good news” rhetoric so popular in our industry. It’s quite easy to construct a negative scenario around that oil price slump. What if its demand led rather than supply led? What if demand from China or a lack thereof is part of the reason for the low oil price? Certainly a 10 year Treasury yield of under 2% doesn’t really anticipate high levels of economic growth. Anyway let’s hope it is good news.

Falling oil price good for Kiwi investors

A fall in oil prices is being tipped to underpin a global economic lift this year, and provide a boost to New Zealand.

Monday, January 12th 2015, 10:08AM 1 Comment

Comments from our readers

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