A January 29th report from Barclays Equity Research suggests that investors are focusing too much on the bleeding in the energy sector from the huge drop in crude prices, and not enough on the major benefits to consumers (and consumers good producers) that can be expected from an additional $1.6 trillion in income in 2015 due to lower oil prices
Barclays analysts Ian Scott and colleagues argue that investors are too negative, and that the consumer discretionary sector currently represents a good buying opportunity. They note: “This [investor focus on the energy sector] suggests a “glass half empty” approach reflecting the negative side of a possible $1.6 trillion transfer of income from oil producers to oil consumers, but not yet the potential benefits.”
Crude oil plunge could result in $1.6 trillion wealth transfer in 2015
The Barclays report notes that if crude prices stayed at around $50 a barrel throughout 2015, this would imply a reduction of expenditures on oil from around 4% to 2% of global GDP. When you do the math, that ends up as a transfer of $1.6 trillion from “oil producers” to “oil consumers”.
Moreover, lower oil prices actually offer a “double whammy” positive economic effect in that most products are cheaper to produce and consumers have a good bit more cash in their pockets to spend because of lower gas prices and utility bills.
Consumer discretionary sector undervalued
Scott et al, highlight that, in valuation terms, “the consumer discretionary sector has been materially de-rated relative to the oil producers and now trades on a discount for the first time since 1999.”
As can be seen in Figure 6, returns for oil producers have been very poor, yet oil consumers have not enjoyed a corresponding rally as oil prices have dropped.
They elaborate that the declines in oil producers’ earnings have outpaced the declines in their stock prices, so the sector has in fact been re-rated, from 12.5 at the end of July to 15.7 times currently. That said, the forward multiple for the global consumer discretionary sector has not budged at 15.5. The market is therefore priced for a bump up in earnings for the oil producers, but not for the expected improvement in discretionary consumer spending described above.
Furthermore, as Figure 7 makes clear, the consumer discretionary sector is trading at a 1% discount to the global energy sector, far off of its historical 31% premium.
Of note, the world’s 50 largest consumer discretionary and transportation stocks as a group have seen no improvement in earnings or share prices since mid-summer. The Barclays analysts note: “This seems inappropriate given the prospect that discretionary consumer spending accelerates in a lagged response to lower oil prices.”