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Following a series of twists and turns, investors scrounging for yield are looking at the emerging markets fearing that Treasury yields at home might run out of steam. In the first six months of 2013, the U.S. market showed resilience with its steady recovery vis-à-vis emerging counterparts.
Last week’s U.S. macroeconomic data in the form of lower unemployment numbers, receding weekly jobless claims, and Q2 productivity data painted a positive picture for the U.S. economy.
The growth was also amply supported by the Fed’s northward interest rate policy. However, with the imminent regulatory monetary tightening, investors are now looking elsewhere.
Now, with President Obama winning the support of key Republicans for his conflict with Syria, the oil bubble is slowly building up. Any chance of it bursting near-term seems unlikely with the Obama administration focusing on pooling international backup for military measures in Syria over its alleged use of chemical weapons.
As a result, much like the global oil and gas market during the 1990 Gulf War, the 1997 Asian crisis, the 1998 Russian economic crisis, and finally the 2008-2012 global financial crisis, the sector is set to witness upward oil prices. To add to this, higher demand from emerging economies adds to the pricing pressure.
Persistent supply disruptions due to unstable Middle Eastern geopolitics have taken a major toll on oil import-dependent emerging nations like India and Indonesia. The direct fallout of the Syrian military buildup was the spike in Brent crude prices, which is hovering around $116 per barrel after a steady rise over the past three months. In such a scenario, we believe any military action in Syria by the U.S. will push up crude oil price to around $125 per barrel in the near term.
3 Emerging Oil Winners
Given the oil market conundrum, our investment horizon now closely inspects oil-weighted companies and related support plays with a distinct focus on the emerging economies. Instead of putting all eggs in the domestic basket, we close in on an integrated trio of two Chinese majors, China Petroleum & Chemical Corp. (SNP - Analyst Report) and CNOOC Ltd. (CEO - Analyst Report) alongside the Brazilian behemoth Braskem S.A. (BAK - Snapshot Report).
We suggest investing in China Petroleum & Chemical Corp., also known as Sinopec, with a Zacks Rank #2 (Buy). The company is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products, in China. On Aug 25, Sinopec posted better-than-expected earnings supported by outstanding results in oil and gas exploration on domestic growth.
Our bullishness is perked by its expected rise in refining margins in the second half of 2013. The stock is going for about 7.8x the estimate for 2013, which is in-line with its peer group average. The stock should not disappoint investors given the company’s long-term expected earnings growth of 6.93%.
Another stock that investors may look forward to is Chinese offshore giant CNOOC Ltd., which currently carries a Zacks Rank #2 (Buy). It is China’s dominant producer of offshore crude oil and natural gas. CNOOC is the only company permitted to conduct exploration and production activities with international oil and gas companies off the shores of China.
The company recently reported solid second quarter results on the back of higher overseas production from its February acquisition of Canadian energy producer Nexen Inc. alongside steady performances by the already operational oil and gas fields. We remain optimistic on CNOOC as its performance reflects its premium assets portfolio, excellent execution strategy, unique position as a pure oil play and potential transactions in the merger and acquisition space.
The stock boasting a solid ROE of 20.8% vis-à-vis only 8.1% of the peer group average is another big positive. The stock also has a long-term earnings growth expectation of 6.25%.
Our final pick is the largest Latin American petrochemical operator Braskem SA which currently holds a Zacks Rank #2 (Buy). The company is steadily improving backed by higher sales volume, improving operating performance and rising thermoplastic resin spreads.
The petrochemical operator is functioning at almost full capacity to cater to rising domestic demand for its products. Braskem is expected to witness earnings growth of 153.69% in 2013 and 117.54% in 2014. Moreover, a price-to-book (P/B) ratio of just 1.7 suggests that the stock is still undervalued.
We believe that these emerging market stocks with strong fundamentals and growth prospects are capable of offering investors solid returns.