17 Dec Final Note for 2015
As the Canadian stock market hovers around an 8% loss this year, and with about 10 trading days left as I write, it’s clear that we will end the year negative. Most of this can be attributed to energy stocks, which have plummeted in tandem with crude oil. Ironically, many other sectors have had positive growth, and all of them contribute to the increase in demand for energy!
Make no mistake; oil is not going anywhere fast, despite a fairly steady increase in the demand rate. For the time being, energy companies will be focussing on eking out a profit at some of the lowest crude prices in a decade. But energy is cyclical, and while this cycle was due to end, it marks the beginning of a new opportunity for growth. And while oil may not be going anywhere fast, it is going to go. Supply and demand is expected to equalise around the 3rd quarter of 2016 with a commensurate rise in the price of a barrel of oil to $55 (Ed Morse Citigroup). With a very fine margin of supply over demand (1.5%) there doesn’t need to be any major outside influences other than natural growth to rectify the imbalance.
While we fixate on barrels of oil, the value of energy company shares is where investors should be looking. Cuts to exploration, R&D, and expansion will hopefully lower costs to the point of sustainability, but I expect to see a tsunami of mergers and acquisitions around the same time that oil begins to climb in the 3rd and 4th quarter of 2016. Portfolio Managers have been busy repositioning in order to take advantage of this when it happens. Until then it will largely be a waiting game. It might be an uncomfortable time, but it will be worth it.
The Canadian dollar is another casualty of the depressed resource and energy market. As I write, one US dollar is selling today for a fraction of a cent below $1.40 Canadian. It’s spoiled many trips south for consumers on this side of the border. In fact, many prices here at home are now better than across the border after you factor in the exchange. That won’t last but there are still some “bargains” to be had. For the Canadian economy that means our exports are that much cheaper to buy, and presumably that means our trading partners will buy more. We should see the results of that beginning the second half of 2016 making Canada attractive once more. Unfortunately, the outlook for the Canadian dollar is not as good as it is for the price of a barrel of oil. It may take even more time to recover.
As always, there are many different views of the market, and mine is but one of them. Actual results may differ significantly from forecasts. World events like natural disasters and geo-political conflict may also play a role in the way stock markets respond. 2016 is a clean slate with lots of opportunity for growth and recovery.