The end of the beginning?
…but no quick fix in oil & gas. Swelling inventories are now causing more examples of localised operational stress as storage constraints are tested, likely driving high volatility at low oil prices until oversupply is fixed. It will take time to rebalance, as while there are signs that supply is reacting (with non-OPEC production finally starting to decline year-on-year - see chart), weaker demand potentially pushes the rebalancing into 2017 - see Mechanics of the rebalancing: Volatile, taking longer, but on its way, and p.10.
Taking a pounding
This week cable broke below 1.40 for the first time since the GFC, reflecting concerns for the British economy in the event of a ‘Brexit’ vote. Four potential consequences for UK equities include: (1) weaker UK growth; (2) weaker sterling; (3) tightening financial conditions; and (4) a higher risk premium for UK shares. However, our base case remains that the UK stays in the EU, and in this context we maintain a preference to be long the FTSE250 vs. short FTSE100 (see UK: The market, valuation… and Brexit, p.15). Tactically, we highlight UK exporters, Euro to UK importers, and balance sheet mismatches exposed to sterling weakness in Europe's most wanted: Brexit, p.13.
Confronting the scarcity of growth
As negative earnings revisions remain a feature of the European equity market, finding sources of growth is an increasing challenge. In this context, our GS SUSTAIN team looks for growth driven by structural shifts within end markets. In aerospace, for example, aftermarket maintenance offers growth in an industry otherwise concerned about overcapacity; Safran and B/E Aerospace are positioned to take advantage. We identify 24 companies that are Confronting the Scarcity of Growth – p.16.