By Gareth Vaughan
As 2015 beckons the major "game changer" for investors is falling oil prices, and the potential for the price of the black stuff to remain soft for about three years, says Macquarie Private Wealth senior investment adviser Brad Gordon.
Gordon told interest.co.nz in a Double Shot interview lower oil prices will help keep both inflation and interest rates down. The price of oil has dropped from US$110 a barrel last Northern Hemisphere summer to under US$70 now.
"Oil is very much a part of everyone's lives and it's very, very important in terms of a contributor to inflation. So that has been a game changer. Oil has been on a downward trend for the last two to three years, but in recent weeks that downward trend has obviously accelerated," Gordon said.
"So a weak oil price is going to mean weak inflation. In fact the biggest term being bandied around now is dis-inflation. Weak inflation means low interest rates and low interest rates for longer. If you think where our Reserve Bank is currently sitting now, their biggest quandary is all their model inputs should show inflation, but they're not and that's the biggest question mark as to how they look out to 2015."
Macquarie is forecasting an oil price hovering in the low US$60s per barrel for three years. It argues balanced budgets in oil producing countries, rising demand from China and depleting oil fields won't lead to higher prices so long as OPEC, especially Saudi Arabia, wants to keep the oil price low.
"Futures markets see oil at US$70 for 2015 and US$73 for 2016. We think this is too high and see oil near US$60 a barrel as OPEC seeks to cut US shale output and reduce (Russian President Vladimir) Putin's power," Macquarie says.
Such a scenario is effectively a tax cut benefiting low income consumers the most, the firm argues. It cites sectors with the most leverage to low paid consumers as food, soda, retail, media, tobacco and beer. However, cheaper oil prices erode - at least to some degree - the economic cost rationale for alternative energy providers meaning shares in the likes of electric car maker Tesla could be under pressure, Macquarie adds.
Stocks seen outperforming bonds - again
Against this backdrop Macquarie is bullish on global equities, expecting 2015 to be the fourth straight year that stocks outperform bonds.
"We believe the long awaited sell off in bonds will be delayed another year as low oil prices depress inflation and prolong easy monetary policy in the USA, Europe and Japan."
In terms of equities Gordon suggests 2015 is going to be a stock picking environment, with companies offering good revenue growth the most attractive. Mid-cap companies in niche businesses are of particular interest, he says. In Australia he points to Realestate.com and travel insurance provider Cover-More Group, saying companies rolling out new services and expanding into Asia look attractive.
In New Zealand Gordon cites utilities offering good dividend yields, such as electricity generators and retailers.
Bonds, meanwhile, are the asset class causing the most head scratching.
"The market has tightened up this year because there has been very little new issuance, so those investors that are looking to the bond market have had to pay up," said Gordon.
More bank bonds seen
Gordon does, however, expect increased new bond issuance, especially from banks given the Australian Government Financial System Inquiry final report recommends big banks raise and hold more capital.
"So New Zealand investors should see a lot more bank issuance in 2015 in the tier 1 or hybrid space. But in terms of the interest rate outlook, it's a real head scratcher because interest rates are low, but are they going to get lower and for how long? It's a really tough one to answer."
In terms of the buoyant Auckland housing market, Gordon sees low interest rates as the key one of several contributing factors.
"I think as people have assumed lower interest rates for longer their affordability increases quite markedly. So as long as those things stay even, and it does look like interest rates are going to stay low, then the Auckland property market should be well supported (in 2015)."
In terms of currencies, Gordon said expect more volatility as central banks wrestle with just what they should be doing in the current environment. On this front the US Federal Reserve will - as ever - be a key factor, with the questions next year centring around if and when it raises interest rates.