bp's global statistical review - russia and the situation in ukraine

Invast Insights

Week Commencing March 10, 2014

www.invast.com.au | 1800 468 278

This week we look at the following topics:

1.0 Russia and the situation in the Ukraine

2.0 Monthly portfolio review

3.0 Property vs. shares and gold performance

4.0 Focus on the Yen crosses


1.0 Russia and the situation in the Ukraine

First, the facts. Russia produced around 10.6 million barrels of oil in 2012

according to BP’s Global Statistical Review. This was second only to Saudi

Arabia who produced around 11.5 million barrels. BP will release its 2013

statistics in the next few months; we don’t expect to see too much

proportional change. Total global oil production is currently at around 86

million barrels, this highlights Russia’s position. Russia is even more prominent

in natural gas production; it produced around 592 billion cubic metres in 2012

which was the largest single production by a nation. A large proportion of this

gas exports through legacy pipelines, which run through countries like the

Ukraine and end up as a major energy source for most of Western Europe.

We suggest you read a note by global intelligence firm Stratfor called “Ukraine

and the Little Cold War’. You can view the article by clicking here. This is

probably the only single piece of analysis we read in the past few days that

explains the issue to its core. It will also help you map out where this fits in

http://www.stratfor.com/weekly/ukraine-and-little-cold-war?utm_source=freelist-f&utm_medium=email&utm_campaign=20140304&utm_term=Gweekly&utm_content=readmore




the overall tussle between Russia and Europe in terms of energy dependence.

As Stratfor notes “The Orange Revolution in Ukraine, from December 2004 to

January 2005, was the moment when the post-Cold War world genuinely ended

for Russia. The Russians saw the events in Ukraine as an attempt by the United

States to draw Ukraine into NATO and thereby set the stage for Russian

disintegration. Quite frankly, there was some truth to the Russian perception.”

At the end of the day, Western Europe needs its energy and Russia knows this

well. This brings us to the second point, politics. Russia can afford to negotiate

its geopolitical interests on its own terms because it knows that whatever

reasonable measures it puts into place, there is little that Western Europe can

do economically. A military occupation of Crimea and other Russia interests in

and around the Ukraine will be met with nothing other than Western vocal

opposition. Russia knows that it can push its military to certain points with

little consequences. The West will use its media and lobbying to try and paint

Russia as an aggressor but this is not likely to make any difference, as has

been the case in Syria for the past two years.


The third point is economics. If there are military strikes in the Ukraine, which

is not likely, there might be a slight spike in the gold price. Russia needs

global markets to sustain its economy; it cannot afford to isolate itself. It

knows that military operations are a just a means to prove the point that it is

a force to be reckoned with. The whole issue highlights a bigger theme

around energy prices. Western Europe is held hostage to a dominant and

defiant Russia which is still a completely dominant force in energy markets.

Stratfor notes in its report “In an energy-hungry world, Russia's energy exports

are like heroin. It addicts countries once they start using it. Russia has already

used its natural gas resources to force neighbouring countries to bend to its

will. That power reaches into the heart of Europe, where the Germans and the

former Soviet satellites of Eastern Europe all depend on Russian natural gas.

Add to this its other resources, and Russia can apply significant pressure on

Europe.”

This means Western capital and technology will chase diversification in the

coming decade. North Africa and the Mediterranean are key areas of energy

development for Western Europe, particularly for liquefied natural gas. If the


West cannot get this type of diversity up and running fast enough, we feel the

squeeze on oil prices will be profound.

We remain bullish on energy this year and the Ukraine situation is one of

many examples which we expect in the coming years. Here at Invast we

believe play it safe, play it smart. Elsewhere, oil we see is a buy on any short

term pullback, there is the prospect of an upward break in the region of

US$115 for Brent.

2.0 Monthly portfolio review

It’s been a mixed month for our portfolios. The good news is that the Wealth

Preservation portfolio has started to improve its returns, Woolworths has

been a solid performer during the month posting some impressive sales

numbers. Westfield has also recovered and seems to have formed a nice base.

Woodside reported reasonable numbers and we have also attributed the

dividend to the cash balance. Next month will see Woolworth’s balance being


banked. The Drawdown Phase portfolio we feel, is also doing great, Telstra’s

dividend has been banked and the remaining stable securities are providing

the rock solid certainty that this type of portfolio requires.

The biggest disappointment this month has been in the Wealth Creation

portfolio – the one that has been performing the best in recent months.

Adslot (ADJ) shares fell heavily during the month and triggered a stop loss

which we mentioned as part of our portfolio rules when launching them in

September. We have a firm 20% stop loss rule for any change in that order

over one week. Stocks in the Wealth Creation portfolio are usually small and

illiquid so it is important to have these types of measures in place.

We will be running another webinar in the next few months for new

subscribers and clients to keep them up to date with our portfolio

methodologies and portfolio rules in place. Still, all three portfolios have

posted positive returns since inception and should outperform their targets

by the end of the year. The Wealth Creation portfolio still has around $9,500


in cash and we are continuing in our hunt for small cap gems. We will be

making a key acquisition next month with a whole section on the particular

stock.

The diversity in the Wealth Preservation Portfolio continues to highlight the

low volatility and steady growth stream. We still feel comfortable with all the

three individual stocks we own. Woodside Petroleum did fall after its result

but we think it is very well placed to benefit from rising energy prices. Even if

the stock doesn’t move for a while, the dividend is very attractive and we will

continue to bank it. Westfield as we mentioned early is due for an upward leg,


we maintain our full confidence. Woolworths is very well placed to benefit

from inflation returning into its average sales basket in the coming years.

Deflation was somewhere the order of 4% over the past six months, a level

that is clearly unsustainable. Food and grocery prices will start to rise

modestly and this will all flow through into higher absolute earnings and free

cashflow for Woolworths.

We continue to build cash steadily in the Drawdown Portfolio and remain

pleased with the fact that the annualised rate of return is sitting at 8.3%. The

decision to exit AMP was in hindsight a little premature but it’s better to be


safe than sorry. Our focus here is on extreme caution and modest income.

3.0 Property vs. shares and gold performance

We recently ran a comparison of four key markets ahead of our presentation

at the Trading, Franchise and Property expo in Melbourne later this month. We

thought it would be a great opportunity to show the performance of

Melbourne property, Australian shares, Gold and Silver over the past ten years

on an initial investment of $100,000. The chart below shows the performance

of each asset class on the initial investment. It’s worth keeping in mind that


we excluded fully franked dividends which are an important part of the stock

market, so if we included these shares would have actually performed better.

We also excluded income from property – rent – in order to level out the

playing field.


Image source: ABS website, ASX historic performance, Kitco Metals website


The chart performance speaks for itself. We don’t advocate people just jump

straight into Gold and Silver and forget the rest, rather we think the average

investors needs to take into consideration that property does tend to rise, but

so too do other markets that can be more liquid and flexible to exit. The

perception that shares are risky is true depending on what type of shares an

investor builds their portfolio around. The chart shows that despite the global

financial crisis, the Australian market overall has managed to generate a very

respectable return in ten years, almost doubling the initial investment of

$100,000. The purpose of our portfolios is to provide you these consistent,

long term sustainable returns.

For those looking at some current trading ideas, short term in nature, we

recently ran a scan across all listed companies in Australia and we screened

for stocks which matched the following criteria:

• Are in a robust uptrend.

• Priced in the low cap range between 10 cents and $1.20.


• Daily turnover is at least $50,000, so the really small low cap stocks are

removed or at least those stocks that have a low (relative) turnover.

• The cover a broad range of sectors for potential diversification.

Our results are as follows, data is compiled as of 5 March 2014.


4.0 Focus on the Yen crosses

As the risk aversion in the market fades away, the Japanese Yen is likely to

resume its depreciation against the major currencies. Most of the Yen crosses

are trading near key levels, and we think it is worth the time to focus on these

currencies this week.

USD/JPY: The pair has been traded in a range following the completion of

market correction at the end of January. USD/JPY retraced 50% of its Q4 rally

before finding support at 101.00 support level. Resistance for the range

remains at 103.00 previously a support turned resistance, and until mid-March

this level coincides with the Ichimoku Cloud resistance. While we expect

further depreciation in Japanese Yen, USD/JPY we see will remain range

bound as long as 103.00 resistance exists. Our focus this week will be 103.00

level as a rejection here could see the pair track down towards the lower end

of the range, while a confirmed close above 103.00 on the Daily chart signals

an uptrend continuation for the pair. Our preferred strategy is to sell USD/JPY


close to 103.00 with a stop loss of no more than 103.50. We will target 102.00

and 101.50. Please keep in mind that a daily close above 103.00, is a bullish

sign and can also be used as a signal to reverse this trade.


EUR/JPY: EUR/JPY correction in the month of January is much more

significant, going as far as 61.8% Fibonacci retracement. The bounce from

61.8% at 136.69 triggers a rally, but as with most Yen crosses the risk aversion

in the past 2 weeks halted further progress. We do anticipate an uptrend

continuation in the near future and our trigger is the daily close above 141.00

key resistance that has kept the pair from progressing further in the month of

February. On the support side we have 139.00. Momentum for the pair is

currently neutral as indicated by price trading within the Ichimoku cloud and

Stochastic Oscillator just hovering around the 50 level. We prefer to go long

EUR/JPY preferably on a confirmed close above 141.00 with stop below 139.00

key level. Targets to the upside are located at 142.75, 144 and 145 where last

year’s high was.


GBP/JPY: Out of all the Yen crosses, GBP/JPY got a head start on the back of

good economic numbers from UK last month. The pair is now trading above

the Ichimoku Cloud on the Daily chart, and is on track for progress towards

172.50 and 175.00. Stochastic Oscillator is now crossing up indicating a bullish

sentiment and more momentum to the upside for the GBP/JPY. We prefer to

buy on dips for the GB/JPY, preferably around 170.00 and 170.50, with stop at

168.50 and targets at 172.50, 173.50 and 174.50.

AUD/JPY: Chart below. The pair bounces off 90.00 key levels last week and

with some help from the better than expected GDP numbers from Australia;

AUD/JPY manage to trade back above the Ichimoku Cloud, indicating a shift

in sentiment and trend in the near future. There is a resistance trend line in

the vicinity of 92.50 that will test AUD/JPY this week, but stochastic oscillator

suggests more upside momentum behind the current push higher.

Considering that the pair is traded within a triangle, our strategy will be one

based on a breakout. We are looking for a daily close above 92.50 before

buying AUD/JPY with stop at 91.00 and targets at 95.50.


Read through our blog to keep updated with important trading information.

http://blog.invast.com.au/




7.0 Disclaimer

Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

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bp's global statistical review - russia and the situation in ukraine

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