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Hewison Insights
Market volatility

Market decline – Blame it on shale!

Andrew Hewison
Managing Director
2 Dec 2014

While the United States celebrated Thanksgiving over turkey late last week, the Australian share market was dishing up a generous serve of volatility.

From a one year high of 5,672 in September, the All Ordinaries had fallen to 5,153 by mid-October. That is a 10 per cent fall in less than a month. By the next  month the market had returned to 5,522, but last week it has fallen back to 5,212. 

What has caused this volatility?

The latest fall was driven by losses mainly in the resources sector, namely oil and gas. OPEC, the Organisation of the Petroleum Exporting Countries, is becoming more concerned by the increase in shale oil and gas supply out of the U.S.

Shale is a fine-grained, clastic sedimentary rock composed of mud that is a mix of flakes of clay minerals and tiny fragments of other minerals, especially quartz and calcite. Developments in drilling techniques have allowed for oil and gas to be mined from shale instead of traditional reservoirs.

In response to increased shale supply, OPEC has flooded the market with oil, which in turn has driven down the price to below $65 per barrel, 45 per cent lower than its’ high in June 2014. This is in an effort to sink the price of shale and squeeze the higher cost producers out of the market in the U.S.

The victims of OPEC’s practices are oil and gas producers such as Woodside Petroleum, BHP, Santos and to a lesser extent Origin. The companies themselves continue to perform as a whole, but in the short term they will be affected as OPEC flexes its muscle.

Cause for concern, or buying opportunity?

Hewison Private Wealth takes a long term view to investment and where possible we prefer to recommend blue chip stocks when they appear undervalued. This would be one of those occasions.

For the most part, at a business level the companies mentioned continue to perform as usual. Their recent share price falls do not reflect their day to day performance. In our opinion it certainly seems as though this is a short term occurrence and when the market returns to more stable levels, we believe these companies should recover their recent declines.

However, if you have any specific queries or concerns relating to your investment portfolio, please contact your adviser.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.