The BFG Report

Welcome to the 2015 Autumn Edition of the BFG Report.

Since June 2014, the price of oil has continued to plummet and this has been a major focus for economic observers. The West Texas Intermediate (WTI) oil price (a grade of crude oil that is used as a benchmark for the price of oil), has fallen by 57 per cent — a staggering decline which hasn’t been seen since the global financial crisis.

What’s caused oil prices to plummet?

The main factor is the shift in supply and demand. Global demand for oil has been weaker than expected (particularly in the weakening economies of Europe and Asia) and this has coincided with increased production in the US and Canada (countries that initially wanted to take advantage of the high oil prices).

Despite the falling prices, the Organisation of Petroleum Exporting Countries (OPEC) has not been willing to cut production (which would help to prop up oil prices) and, as a result, prices have continued to fall.

What is the effect of a falling oil price?

In Australia, as oil exploration budgets and returns from new oil production projects decline, the sector servicing the industry is under pressure. For example, the market capitalisation of Australia’s WorleyParsons — a major provider of services to the Canadian oil sands producers — has halved to $2.2 billion.

As oil prices decline, so too do the taxes and royalties that governments collect from the producers. Governments that rely on oil taxes, such as Russia, Alaska, Iran and Venezuela, experience a fall in tax receipts and this can affect government budgets and spending plans. Fiscal pressure can impact politics and, as politicians come under pressure from the population, geopolitical risks increase. In Australia, the federal budget is already strained by lower iron ore prices and will likely continue to be under pressure due to declining oil prices.

On the plus side, consumers benefit from lower oil prices at the petrol pump where fuel prices have been the lowest they’ve been in years. Similarly, airlines and other transport companies benefit from the lower petrol prices as it lowers their overall cost bases.

Eventually, it’s expected that oil prices will rise. But, it may take some time.

Changes to fringe benefits tax (FBT)

Fringe benefits tax (FBT) is paid on certain benefits employers provide to their employees in place of salary or wages.

From 1 April 2015, the FBT tax rate will be increasing to 49 per cent (from 47 per cent) for a period of three years to 31 March 2017. After that date, the FBT rate will return to 47 per cent.

This reflects the three year temporary deficit repair levy of 49 per cent for those
who earn more than $180,000 starting from 1 July 2014.

This means that if you earn below $180,000, the new FBT rate will impact you
even more so as you will be paying above your marginal tax rate on
fringe benefits.

Investment Market Review – Quarter Ending 31 December 2014

Asset Class – Australian Shares
Index – S&P/ASX 300 Accumulation index
1 year return – 5.30% p.a.
5 year return – 6.48% p.a.

Comments
The S&P/ASX 300 index delivered a 2.9% return in the December quarter. The better performing sectors were the more defensive sectors with Healthcare up 13.3%, telecommunications gaining 12.3% and REITs improving by 11.3%. Industrial and financials outperformed the benchmark each by over 4%, whilst cyclicals lagged. Energy was down 17% and came under severe selling pressure following a sharp fall in the oil price. The materials sector also experienced a 5.8% decline as the iron ore price continued its weakness.

Asset Class – Listed Property Trusts
Index – S&P/ASX 300 A-REIT index
1 year return – 26.79% p.a.
5 year return – 12.04% p.a.

Comments
The S&P/ASX 300 A-REIT index rose by 11.3% over the quarter significantly outperforming the broader market by 8.4%. The impressive performance was supported by stable earnings growth, falling bond yields and strong investor demand for relatively high yielding asset classes such as Australian property.

Asset Class – International Shares
Index – MSCI World accumulation index (AUD)
1 year return – 14.72% p.a.
5 year return – 12.30% p.a.

Comments
Global markets finished a volatile December quarter in positive territory on an unhedged basis assisted by the falling Australian dollar. The S&P 500 was up 4.4% and the Nikkei 225 gained 7.9% whilst FTSE 100 and European markets declined. The sharp fall in the oil price impacted the share prices of energy producers. There was, however, further evidence that the global economy is slowing. The US economy produced its fastest rate of quarterly economic growth since 2003 and employment data beat market expectations. China’s economic growth rate continued to slow down, approaching an annualised rate of 7%, as key manufacturing data continued to remain subdued.

Asset Class – Fixed interest and cash
Index – Bloomberg AusBond Composite index (Previously called UBS Composite Bond All Maturities index)
1 year return – 9.81% p.a.
5 year return – 7.33% p.a.

Comments
The benchmark produced strong returns in the December quarter with Australian bond yields falling sharply in contrast to investment grade credit (having been a strong performer over the past few years). The global economy finished the calendar year with negative momentum amid commodity price concerns — oil, upcoming Greek elections and inflation expectations in Europe due to cyclical deflation. The US economy is proving resilient, and remains on a path to recovery. In Australia, while economic data was mixed, rebalancing the economy away from mining appears difficult.

Asset Class – Cash
Index – Bloomberg AusBond Bank Index 0+Y (previously called UBS Bank Bill index
1 year return – 2.69% p.a.
5 year return – 3.83% p.a.

Comments
Money market yields rose slightly in the December quarter despite increased market expectations for official interest rates to fall in the short term. The spread between bank bill yields and cash rates widened over the quarter.

High Yielding Internet Savings Accounts

Financial Institution and Interest Rate

ING Savings Maximiser – 4.00% p.a.

BankWest – Hero Saver – 4.00% p.a.

UBank – USaver Ultra – 3.77% p.a.

St George – Maxi Saver – 3.45% p.a.

Westpac – ESaver – 3.26% p.a.

ANZ – Online Saver – 3.25% p.a.

Rates sourced from RateCity.com.au and are subject to conditions and change. Rates are correct as at 20/02/2015.