North American Portfolio Strategist Martin Roberge reflects on the markets of 1998. Whether one looks at equities, bonds or currencies, the past three months have perfectly mirrored the August-October 1998 playbook. One year out, this roadmap suggests further stock market gains, flat bond yields and a stronger CDN. Interestingly, on a one-year forward PE basis, Figures 5 shows that the S&P/TSX and S&P 500 are respectively 20% and 12% cheaper than they were at the end of October 1998. What is more, US 10-year Treasury and investment-grade bond yields are ~200bps lower. Now, from the October 1998 close, the market rose another 25% before financial conditions improved enough for the Fed to begin raising rates in June 1999. True, the earnings outlook appears more challenging this time around but with current market EPS growth expectations at ~8% for 2016, this projection seems not out of reach considering the softening US$ and commodity-price base entering next year. Therefore, like Asian crisis 1.0 in 1998, the market volatility in version 2.0 could well be classified in the “correction within a bull market” category.
Christopher Brown Director of Oil & Gas Research outlines key catalysts to watch for, along with his revised estimates. Christopher has reviewed his coverage list from a balance sheet perspective and identified five companies which have (on a combined basis) the ability to deploy up to $1.4 billion on potential acquisitions, as shown in. In order of largest to smallest acquisition potential, the companies are: Gran Tierra (GTE:TSX), Parex Resources (PXT:TSX), Bankers Petroleum (BNK:TSX), WesternZagros (WZR:TSX) and TransGlobe Energy (TGL:TSX).
To date M&A activity in the international space has been minimal but we expect that to change in 2016. With IOCs and Majors looking to divest of non-core assets, the timing could not be better to capitalize on low commodity prices. In Christopher’s report, he highlights how billions of dollars of opportunities will likely become available in Brazil, Colombia, the Middle East, and South East Asia. We also outline the value of international gas assets, where prices range from $4 -13/mcf. This compares to domestic prices which are expected to remain below $3/mcf for the foreseeable future.
After another slow start, the S&P 500 is up ~0.5% for the week despite the Fed sending a hawkish signal to markets. According to the FOMC statement, the Fed has become less concerned about global risks and is considering a rate hike in December should economic data and financial conditions warrant it. As mentioned in the November edition of the Quantitative Strategist, we expect US headline inflation (currently at 0.0%) to rise and close the gap with core inflation (1.9%) in 2016. Indeed, energy should stop being a drag on headline inflation beginning in Q1/16. Thus, the Fed may want to force market participants to price in a rate hike, aiming at normalizing its monetary policy before inflation accelerates. Furthermore, the central bank faces communication challenges and faltering credibility. So far, the message is filtering through, with markets now pricing a 50% chance that the Fed will strike in December. As a result, bond yields jumped, but surprisingly the DXY remained flat for the week and the S&P 500 further advanced. Meanwhile, after a rough start, oil rebounded despite a mostly in-line inventory build. That said, gasoline stocks declined markedly, meaning more crude is needed.
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