December 2014 could go down as a nasty moment in Australian finance. MYEFO will reveal a deteriorating budget deficit and the UNFCCC meeting in Lima, Peru will provide the agreement, to be ratified in Paris in 2015, on how much (or little) CO2 is to be allowed into the atmosphere from 2020.
Lima is far more important for Australia as the agreement will provide a good guide to investors and analysts, including rating agencies, on how much coal, oil and gas will be left in the ground. From this information, commodity and company valuations can be derived. I think it will be found that current valuations are too high by quite a margin - stranded assets! *
The initial feedback from the conference in Lima is that a strong agreement to limit CO2 will be reached. Necessary targets will be set to limit temperature rises to 2C by 2100. This isn't good for Australia long term as we export coal, but it is good for the world of course. The key thing is that the numbers will be in before Christmas.
All this uncertainty means we would stay away from risky securities* until the information from MYEFO and Lima is released.
If demand for fossil fuels is constrained prices will go down permanently.
A bear market could feed through to ASX listed hybrids. We would, as mentioned previously, avoid AGL, Origin and Caltex hybrids as well as the Basel 3 Alternative Tier 1 bank hybrids. Term deposits or the CBAHA are fine places to park some cash and wait.*
*Please note this article has been prepared by BR Securities and is general advice only.
General Advice AFSL 456663 www.brsecuritiesaustralia.com.au