Outside of the broad negative impacts on the public purse of oil exporters, there are concerns about the sustainability of the dividends of the integrated oil majors. For example, as Canaccord Genuity points out, both BP and Shell currently yield over 7% on current share prices, a level that in the past “has indicated a heightened probability of a dividend cut”.
And, as spreads in the US high yield bond sector indicate, markets remain concerned about the potential for defaults in the energy sector over the course of the year.
A slightly less remarked upon impact is one pointed out by AXA Investment Management, which noted on Wednesday that: “the oil market is so much oversupplied that its capacity to price hypothetical developments is very limited, so long as nothing actually changes the supply/demand disequilibrium. Therefore, equity markets, which are deep, liquid and highly sensitive to risk appetite, is the place where bad news is most easily priced-in.”
There is, however, another side to the oil coin and a theme that a number of investment houses are looking to in 2016 – those countries and companies that are liable to benefit from ongoing lower prices.
SocGen’s Alan Mudie told reporters in London that the firm likes consumer discretionary stocks for this reason.
Unicorn Asset Management’s Simon Moon and Fraser Lundie, managers of the Unicorn UK Income Fund are also looking to play this theme.
“the UK Income Fund has been steadily increasing its exposure to the domestic economy and, most significantly, the UK consumer over the last couple of years and this remains our strongest theme,” the pair said.
“The UK consumer is in a strengthening position as a confluence of factors combines to increase discretionary spending power: rising disposable income; imported deflation through the falling price of oil; and falling prices of consumer staples.”