Short Memories, Anyone For Oil?

October 12, 2018

We firmly believe that ‘patience’ and ‘temperament’ are competitive advantages for investing. In a world where sound bites, tweets, and a 24-hour news cycle dominate our headspace, dramatic overreactions to events have increasingly become the norm.

Four years – our average holding period for a stock – to some investors now seems like an eternity. We were struck recently by the contrast in the market’s outlook for oil over this timeframe. In 2014, many deemed the commodity as a relic of the past, with new paradigms in demand (electric vehicles) and supply (shale) condemning the commodity to over-supply and a long-term glut. Energy stocks moved accordingly; the sector fell 27% in Australia in 2015.

Many of the same ‘experts’ are now calling for a boom in oil, notwithstanding electric vehicles sales surging (+68% year-on-year) and US field production actually at peak levels (11.1mb of oil per day versus the prior peak of 9.6mb in 2015).

Amidst this noise, Yarra Capital Management’s clients have been rewarded in recent years from owning investments in energy companies including Santos (STO) and Origin Energy (ORG).

Our attention is now focused on other parts of the market where investors appear to be overreacting: the so-called Australian property crash (Sydney prices go up by 75% in five years then slip by 6%) and the Telco sector (the NBN was forecast to ruin the industry’s economics).

We expect our differentiated positions in the Banks (+350 bps), Construction Materials (+330 bps) and Telcos (+410 bps) will serve our clients well.