MYEFO and Lima - December could be nasty.
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
Frequently Asked Questions about this Article…
The MYEFO report is crucial for Australian investors as it reveals the state of the budget deficit. A deteriorating deficit can impact economic stability and influence investment decisions, making it important for investors to stay informed.
The UNFCCC meeting in Lima is significant for Australian investments because it will set agreements on CO2 emissions, impacting the future of coal, oil, and gas industries. This could lead to changes in commodity and company valuations, affecting investment strategies.
Investors should be cautious about fossil fuels because if the demand is constrained due to CO2 agreements, prices may decrease permanently. This could lead to a bear market, affecting the value of related securities.
Stranded assets refer to investments that may lose value due to changes in market conditions, such as stricter CO2 regulations. For investors, this means potential losses if current valuations are too high and cannot be sustained.
The article suggests avoiding risky securities, particularly AGL, Origin, and Caltex hybrids, as well as Basel 3 Alternative Tier 1 bank hybrids, due to the uncertainty surrounding fossil fuel demand and CO2 agreements.
During uncertain times, investors can consider parking their cash in term deposits or CBAHA, as these are seen as safer options while waiting for more information from MYEFO and the Lima conference.
The agreements from the Lima conference aim to set necessary targets to limit global temperature rises to 2C by 2100. This is a positive step for the environment but may have long-term implications for industries reliant on fossil fuels.
A bear market, potentially triggered by constrained fossil fuel demand, could negatively impact ASX listed hybrids. Investors should be cautious as these securities might experience decreased valuations.
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