Have oil prices peaked?

Australian motorists are not the only ones hoping that global oil prices have peaked after reaching four-year highs in 2018. Not only do high oil prices flow through to the price of petrol at your local service station, but they also increase the cost of doing business for everyone from farmers to airlines and push up the cost of living for households.

On June 22 the Organisation of Petroleum Exporting Countries (OPEC) plus Russia agreed to increase output by one million barrels a day, or about 1 per cent of world supplies, to relieve global shortages and lower oil prices. Even so, the price of Brent Crude rose to US$75.60 a barrel immediately after the announcement amid concerns the target may not be met. As at June 29, the oil price had surged 64 per cent in 12 months, but if OPEC and Russia succeed in lifting supply prices should begin to fall.

There are several international oil prices quoted in the media, but the price of Brent Crude is considered the major global benchmark.

What’s going on?

OPEC’s latest turnaround follows four years of determined efforts to limit oil production and boost prices. The price of Brent Crude crashed from US$115 to US$30 a barrel in 2014 as cash-strapped producers including Russia and Venezuela increased supply. At the same time, the US expanded production from fracking.

Then early this year the freezing northern hemisphere winter pushed up the price of oil as demand spiralled. Brent Crude was trading at a sustained high of around US$80 a barrel until May, when US President Donald Trump withdrew from the Iran nuclear deal.

Under the 2015 deal, nations including the US, France, Britain, Russia, Germany and China agreed to lift international sanctions on Iran’s oil exports in return for OPEC’s third largest producer winding back its nuclear capability.

The first sign that oil prices may have peaked came on news that Saudi Arabia and Russia were discussing a possible increase in oil production. In late May the price of Brent crude eased back to levels around US$76 a barrel before settling at US$77 after the June 22 meeting sealed the deal.

Who’s affected?

Holidaymakers may feel the pinch after Qantas chief executive, Alan Joyce warned airfares could rise in response to this year’s oil price hikes. Jet fuel costs have climbed 50 per cent in the past 12 months which will eat into airline profits, depending on how much of the cost they are prepared to absorb before lifting fares.¹

Rising oil prices also erode profits of transport companies and businesses that rely on the movement of goods or the use of heavy machinery. Australian farmers face the double-whammy of rising fuel costs on top of the effects of drought.

Consumers ultimately pay for higher oil prices as they flow through to the cost of food and other goods.

There are some winners from constrained oil exports though. Australian gas producers stand to gain from increasing demand and high prices as they ramp up production and exports.

Relief ahead for motorists

Rising oil prices have inevitably been passed on to local motorists, although there is relief in sight. The national average price of unleaded petrol rose by 14.7 per cent in the three months to June to a four-year high of 153.3c a litre. Prices edged lower towards the end of June in response to the downward trend in crude oil prices.²

Rising oil prices have been exacerbated by the weaker Aussie dollar which has fallen from US81c earlier this year to recent levels below US74c.

Petrol prices vary enormously between regions, cities and even within suburbs. Australian Competition and Consumer Commission chairman, Rod Sims has urged motorists to use fuel price websites and apps to shop around (you could try MotorMouth or Compare the Market.)³

 

¹ IATA, http://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx

² Australian Institute of Petroleum as at June 24, 2018, https://aip.com.au/pricing/pump-prices

³ ‘Petrol prices stable to March but now hitting four year highs’, ACCC, 5 June 2018, href=”https://www.accc.gov.au/media-release/petrol-prices-stable-to-march-but-now-hitting-four-year-highs

 

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is not a reliable guide to future returns. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way
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Social Proof: The herds and investing

We associate herding with animals. Actually, herding is evident in the human world; in business, in the consumer world and particularly in investing.

What is herding and why does it happen?

And why do herds often form on the basis of such little information? Why do herds form even when that information or such behaviour may be mistaken?

The answers to these questions can be found in something called social proof.

What is social proof? 

Social proof is when people follow the actions of others in an attempt to reflect the “correct” behaviour for a given situation.

This urge to conform to established patterns or to follow the lead of perceived authority figures, trendsetters or simply people “in the know” is the social glue that binds people into a herd. Social proof is the underlying psychological bias that results in what we recognise as “groupthink” (or “risky-shift”) behaviour.

Does this matter? 

In many aspects of life, this tendency to conform and follow is beneficial. In fact, social proof is one of the key human traits that underpinned our evolutionary move to community-based civilisation.

The impulse to act like others in the tribe would have been powerful for millennia.

It follows that the operation of social proof is cumulative and carries a reflexive, self-reinforcing momentum. As the effect ripples out across a larger number of people, the size of the herd will multiply, encouraging more people to confirm the assumption that this must be the right way to act.

But just because many are doing a particular thing, does not make it correct.

What’s the proof?

The best-known experiment that showed the concept of social proof was carried out in 1935 by Muzafer Sherif. He put people into a darkroom and showed them a dot of light several feet away. In reality the dot was not moving but, due to the autokinetic effect, it appeared to move to individuals by different degrees.

When asked individually and then in groups how much it moved, individuals deferred to the group estimate even when it was out of line with their experience. Given the movement of the light was ambiguous, Sherif showed that the participants were relying on each other to define a group-informed “reality”.

The evidence suggests that the social proof bias is amplified in complex situations where the “right way” to act is ambiguous yet the importance of being accurate is critical. In the midst of this complexity, the assumption made is that surrounding people possess more knowledge about the situation.

Investing, then, offers perfect conditions for social proof to operate in an exaggerated way, giving rise to the herd behaviour that can drive bubbles and bursts.

Herded investors

When stock markets are falling, there is a strong pull on our emotions as social proof (and loss aversion) encourages an urge to sell if we see others doing so.

Why are others selling? Do they know something we don’t?

The evidence from behavioural finance suggests the answers to these questions could be surprisingly irrational – that people sell because others are selling.

In stock markets, it is clear that herd reactions don’t need rational thought for fuel.

Think long-term

In the long run, stock prices tend to reflect the intrinsic value of companies. In the short-term, however, the market is often a barometer of changing investor sentiment and a reflection of the average view of the players in the market at that moment.

So why would you aspire to follow the average investor?

We know from stock-market holdings data that investors are prone to short-termism – stock-holding periods have fallen significantly since 1985. The evidence suggests that some investors – the Chinese in particular – are more short term than others. We know that stock-market participation has broadened significantly in China in recent years as many individuals have opened trading accounts. While institutions still own most of the market, data suggests these small investors can account for as much as 80% of daily trading on the domestic Chinese exchanges.

This raises the possibility that falls in the Chinese stock markets, triggered by short-termist investors, can trigger sympathetic falls in other markets via social proof and herding.

In today’s synchronised world, it seems like only the first domino need falter to set off a sentimental chain reaction.

Don’t play copy-cat 

Another interesting dynamic to consider is whether there may be large forced sellers in the market. These may or may not be “trend-setters” worth following, yet their large influence on the market could nevertheless trigger trend-following behaviour.

The sovereign wealth funds of large exporters and oil-producing countries, for example, have accumulated large holdings of stocks in recent years. If an oil-producing nation were to sell stocks held in these funds to raise cash due to the hit a lower oil price is having on the government’s fiscal position, and that is instrumental in setting off a decline in stock markets, should investors around the world become nervous? Possibly, but then again perhaps these are investors who are exposed to companies who benefit from a lower oil price?

The market will correct itself 

Certainly, it seems like social proof can trigger and exaggerate herd behaviour in the absence of rational drivers. Fortunately, there are natural limits to directional herd behaviour as trends fizzle out and sellers become exhausted.

At some point, when the gloom is felt to be overdone, a new trendsetter often emerges – the value-driven investor – who may kick off a new herd behaviour that acts in the opposite direction to encourage a rally in stocks.

With all these mini trends and trend-reversals, the job of keeping up with them is nigh-on impossible – the trading costs would also be onerous. It is little wonder then that successful investors all agree on one thing – the benefit of taking a longer-term view.

In the end, the stock market is rational and reflective of human consumption and human endeavor. It’s people, and their tendency to follow the social norm too quickly, which is irrational.

Source
Reproduced with permission of Fidelity Australia

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

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Myth #4: My Adviser should get me the best returns

SN blog 2016With recent market sentiment being all negative, oil price concerns, China devaluing the Yuan and Australian Share markets at a 2 ½ year low earlier this week, it’s timely that I post the 4th Financial Planning myth of the series; My Adviser should get me the best returns.

A good Financial Adviser, in fact, should be brave enough to admit that they’re unable to control markets and manipulate your portfolio to time markets and ‘buy low and sell high.’ Likewise, adding value by ‘picking’ individual stocks or Fund Managers is elusive.

As John Bogle, Founder and former CEO of Vanguard puts it, ‘Successful Investing is all about common sense.’ ‘Simple arithmetic suggests, and history confirms, that the winning strategy is to own all of the nation’s publicly held businesses at very low cost.’

“So what does a Financial Adviser do, then?”

A truly great Adviser should assist you to build a capital base that produces enough income to enjoy the lifestyle you want to live in the future; all whilst juggling your short term goals such as building a family, educating said loved ones, paying for travel to give your family great experiences along the way, covering contingencies (in case life doesn’t go as planned) and allowing you work-life balance – so you can enjoy the spoils of your hard work.

Indeed, there are many roles an Adviser should play in your life; including educating you to make sound decisions with money, reassuring you during tough times, giving you recognition for your efforts and achievements, providing you with peace of mind, and offering a sounding board to bounce ideas off.

My favourite description is ‘an unreasonable friend’. As a coach and a friend, your Adviser will be someone in your life who gets behind you and can give you a nudge beyond the normal limits you have set for yourself in order to help you reach for something greater. Someone who will not simply tell you what you want to hear, but rather what you need to hear, and always put your interests in front of theirs. It sounds simple, but that is often very difficult to find.

To book an appointment with an Income Solutions Adviser, visit our website now!

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DAVID RAMSAY’S END OF YEAR COMMENT

As the year comDavid EoYes to an end, you will see in the media the so-called financial experts trying to predict what the share market will return in 2016.

Personally, I never make short term predictions about the share market; but if I did it would similar to Nick Murray’s prediction for the US market for 2016. Many people say if the US sneezes we get a cold, however I hope we get what Murray predicts the US will receive in 2016:

“We’re simply observing that five hundred large profit-seeking companies, managed by experienced professionals, are currently planning to commit very large cash sums to strategies which might, if successful, result in both direct and indirect benefits to the patient, diversified, long-term investor”. Nick Murray, Client’s Corner, Dec 2015.

To find out more, I urge you to visit Nick Murray’s website and subscribe to his Newsletter Client’s Corner. The article is entitled How Companies Are Planning To Reward Shareholders In 2016. I also recommend, if you have not already done so – that you attend our free information evening Common Sense Investing. We have dates scheduled for January, however if you are still enjoying your holidays, our 2016 dates and can be viewed here.

Merry Christmas and Happy New Year to all.

David Ramsay, CEO and Founder

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RETHINKING YOUR DECISIONS

Copy of Copy of Copy of Copy of JulyAs part of my current study I was required to research and analyse the Charter Hall Group. I am inclined to share some of my findings with you.

Charter Hall Group (CHG), is a property funds manager which, was founded in 1991. The group employs specialist intellectual property and advanced intellectual knowledge to manage property assets across retail, office, residential and industrial properties. These assets can be held in either unlisted, or listed property trust.

The Charter Hall Group’s intellectual property includes investment management, asset management, property management, transaction services, development services, and treasury, finance, and legal and custodian services as outlined in the Charter Hall Group Annual Report 2015. Consequently, Charter Hall consider themselves to be the upmost experts in property.

On the 16th of June 2006, the Charter Hall Group floated on the ASX, closing at $4.97.

On the 14th of December 2015, the Charter Hall Group closing price was $4.33. This demonstrates a loss of over 12%, in 9.5 years.

I ask you, taking into consideration the information I have just shared with you.

If the experts at Charter Hall are unable to make a profit in the property market, why do so many Australians invest their time, and expend their energy trying to turn property into profit?

David Ramsay, Founder and CEO

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Let your head rule your investment decisions

SPECIAL FEATUREI’ve been watching the news with a heavy heart lately, as I’m sure the majority of people have.  The terrorist attacks in Paris have been shocking and the imagery of people being killed or injured going about their everyday lives, lives not so dissimilar to our own, really strikes fear in your heart.  We start asking ourselves whether we should start changing the way we live.  Questioning ourselves about attending large events.  Asking ourselves how normal life can go on.

The reality is we really don’t know what tomorrow will bring.  But one thing that I firmly believe is that life does go on.  History has shown us that no matter what terrible event happens in the world, normal life continues, the world keeps on turning.  Being part of a financial planning firm, we see people take hold of this fear and uncertainty in world events and they extend this fear to investment markets.  Sentiments like “markets are going to drop” and “the world’s in crisis, so investments will collapse” come to the surface at times like these.  As I said, nobody knows what tomorrow will bring.

The only thing we can do is look at the past and see how financial markets have previously behaved in times of trouble.  When we look at past investment market performance, we can see bumps in the road connected to various world events but in the long term we really don’t see any lasting impact.  If you are investing in the share market you are investing in the companies that we use on a daily basis.  What happened this week in Paris is horrific, just as the attack on the Twin Towers in New York was horrific and the London Bombings were horrific.  Even so, we are still using electricity each day, buying groceries, filling our cars up with petrol – life’s normal consumption of goods goes on.   The normal life that sustains the investment markets.

It’s my birthday today and being a child of the 70’s I grew up loving reggae music.  Bob Marley has a song called “So Much Trouble In the World”.  He wrote the song in 1979.  Clearly the song was written because, in Bob Marley’s opinion, there was a lot of trouble in the world in 1979.  In some respect I guess not much has changed.  One thing I know for sure though – I wouldn’t want to have let world troubles stop me from investing in the share market in 1979.   $100,000 invested in the industrial index in 1979 would be worth approximately $1.7m today and the dividends would be providing me with an income in excess of $70,000 pa.  World trouble can see you experience a whole range of negative emotions but let your head, not your heart, rule your investment decisions…and long live world peace!

Alison Adams, Business Development Manager

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A BIT OF A GAMBLE

A friend came to me the other day asking about shares and to look into a new ‘share trading’ app he had seen advertised on Facebook. He explained that by investing in shares he could turn $250 (the minimum deposit requirement) into $900 in a matter of hours!

This had me thinking, do many people my age see investing in shares as a get rich quick scheme or a way to make a quick buck? From various conversation with friends and family members it seems that they do.

I believe this is the wrong way to think. Shares should be seen as an investment which is held for the long term, providing regular dividends and long term capital growth. We, as young adults, don’t need to find the next speculative stock which share price may double tomorrow.

We have so many years ahead of us that we should be more concerned about creating good saving habits, establishing a sound financial strategy and investing in the right kind of shares. These ‘right kind of shares’ will grow in the background without the need to regularly log onto a share trading app to see if your investment has double (or halved in value) and then quickly sell at the right time. These ‘share trading’ apps sound a bit like gambling to me!

We should be buying the right kind of stocks, holding them for the long term and reaping the rewards of compounding. The information evening that we host at Income Solutions every month (called Common Sense Investing) is a great place to start your long term journey and perhaps hear a new point of view.

If you’d like to hear more, register NOW!

Patrick Dwyer, Associate Financial Planner

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Cutting through the noise: dispelling the myths at an early age

Copy of July (1)Just a week after the return of the grizzly bear to our newspaper front pages the important distinction between capital and income could not have been more starkly displayed.

As this headline from The Age says, Australian companies will pay out an $81.8bn dividend windfall this year, much of which will attract franking credits making it the some of the most tax effective passive income that you can earn.

In the midst of the tumbling capital values last week I had the pleasure of again spending time with a year eleven economics class at a Victorian high school.

I have a huge passion for working with teachers and their students. It is exciting reaching a group at grass roots level to help them gain their own understanding that goes beyond the myths and the ‘noise’ that is generated to sell newspapers.

Getting distracted by incomplete or even miss-leading information doesn’t end when you leave high school.  Like many professions, the stresses, strains and time pressures of the job mean teachers often have little time to stop and think about their specific planning needs.  The personal experience of watching my own parents hurtle towards retirement with no more information than what was thrown at them in the media instilled in me the belief that it is hugely important to search deeper than the headlines and gain a more accurate picture of what is going on.

Students don’t hang back from asking the direct questions.  The timing was great as we were able to have a fantastic discussion about the difference between the capital fluctuations of the ASX 200 in comparison to the march of corporate profits and dividends as it unfolded in front of us.  I didn’t only have to rely on more than 100 years of data to illustrate my point but could call on the CBA’s announcement of a 5% increase in profits matching a 91 point drop in the market on the same day just two weeks prior.

One student wanted to know why the markets fluctuated so wildly when investors should be in search of tax effective passive income to support their lifestyles.  He understood the ASX 200 is made up largely of companies that we touch and use every single day including banks, supermarkets, telecoms companies, energy providers and so on.  He seemed to appear confused as though he was missing some obvious point or “trick” to the share market; why did people need to panic when history showed corrections were normal, values would increase again and when dividends grew consistently and steadily over time?

I’ll let you answer that question.

By Gareth Daniels, Financial Planner

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The Ordinariness of Equity Market Corrections

We have been reminded of late, that sudden, sharp pull-backs in equity prices have not gone away. In fact, they have always been with us—not just lately.

Please refer to table below documenting downturns (drawdowns) since 1928-2014.  Note, this is the US market.

David Blog

Downturns are normal.  I find it fascinating to watch the way our media report these events.  Please refer to the Herald Sun articles below, dated seven and a half years apart—rolling out the same bear image and downward trending line in both articles.

Herald Sun, Wednesday, January 23, 2008

Unfortunately many people will panic; it is easy to see why with this sort of reporting.  People will respond counter to how they should in order to build wealth.  Just as it was in 2008, and every other downturn in history, the correct strategy is simple—hold onto your equity holdings, purchase more of them and wait for your dividends.  These times bring golden opportunities to build your portfolios and increase your dividend (income) stream.

I really recommend coming along to one of our Common Sense Investing information evenings – we talk about this kind of media hype and you’ll also learn about:

  • What causes volatility and what impact it has on your long term investment strategy
  • What asset class (property, shares, cash) will look after you for the long term

Register now for either Geelong or Melbourne!

By David Ramsay, CEO and Founder

 

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