The 2.2 trillion dollar question
* Oil prices unsustainably low; expect gradual move higher
* USD2.2 trillion wealth transfer: the four direct equity impacts
* Overweight energy. Most unloved sector; 20-yr valuation low
With Brent crude prices down 60% since last year’s peak, and close to unsustainable decade lows (in HSBC’s view), we look at the four most direct oil impacts on equities:
Macro. Current price fall has driven USD2.2trn annualized wealth transfer (more than Italy’s GDP) from exporter countries to consumers. Lower inflation gives policy options.
Direct corporate input costs, analyzing oil usage for 915 companies (16 have >10% oil costs/revenue) from ESG data. Asia’s oil costs are the largest and Europe’s the smallest.
Secondary benefit to consumer. Market is aggressively assuming this to be non-existent vs prior oil price falls. Ultimate benefits may surprisingly accrue to EU more than US.
Energy stocks, with high dividend yields and falling free cash flow break-evens. We present two Alpha Strategy screens of global large-cap stocks most sensitive to oil.
Historically during oil price falls, DM outperforms EM, and Defensives lead Commodities.
Changing face of the energy sector. The sector has become smaller, with its MSCI index weight halving in the last decade. But it can still have an impact. MSCI ACWI EPS growth this year is 8% excluding the near 50% energy EPS fall, and 1% with it. Over time, the sector correlation with the oil price has increased, likely as the E+P weighting has doubled.
We are equity strategy overweight energy. It is the most unloved sector globally, relative valuations are at 20-year lows, earnings expectations have halved, and HSBC sees a gradual move higher in oil prices to USD55.4/bbl for 2015e and USD60/70/80/bbl for 2016-18e, as non-OPEC supply falls. 2015-16 demand growth estimates have been rising.