Interactive Investor

Goldman Sachs on banks, oils and tech

21st December 2015 12:39

Harriet Mann from interactive investor

Stamping out any embers that could have sparked the much-anticipated Santa rally, gyrations in credit markets have overshadowed equities this past fortnight. Lower exposure to commodities and more policy support means highly geared European stocks are less vulnerable than US peers, but, in its last 'equity radar' report of the year, Goldman Sachs is still picking stocks with strong balance sheets.

The Federal Reserve's decision to raise interest rate by 25 basis points last week has been taken well by most. Volatility will likely remain, and Goldman also expects a steeper rate path and more rapid acceleration in US inflation than the market anticipates - look for another four 25 basis-point hikes through 2016.

And despite the change seen through 2015, Goldman thinks the key themes that drove markets last year will continue over the next 12 months.

Here's Goldman's outlook for three industries popular with Interactive Investor users.

Oil & Gas

Congress has voted to axe a 40-year ban on US oil exports, which could be lifted as early as next week, suggests Pete Hackworth, an analyst at Goldman Sachs. This is just the latest measure hurried through in an effort to better position the industry to the new normal of low oil prices. US inventories of crude, gasoline and diesel soared by 8 million barrels last week, and the WTI-Brent spread narrowed further, although the longer-term outlook depends on deflation and demand.

It's certainly not looking good for the start of 2016, with Iran possibly increasing exports and focus will shift to balance sheets and dividends as companies with December year-ends report financial results. Keep a close eye on inventories - March, historically, seems to suffer weaker demand.

But with most expecting prices to recover in 2016 or 2017, integrated oil companies do look cheap against the rest of the market, explains Hackworth.

"A not insignificant number in Europe are already 'overweight', with others still closing 'underweights'. While we found little consensus around favoured names, Statoil interestingly continues to see long only support despite risks around European gas prices. Hedge funds appear to have largely reduced risk already, but remain perplexed by the bullishness, with Statoil, OMV, Neste, PKN, Petrofac & Technip the names that come up most frequently with more bearish funds."

Financials

After the Fed hiked rates last Wednesday, the question being asked by investors has switched from "when" to "how fast".

"A higher and steeper yield curve tends to be particularly beneficial for banks and insurers, while a changing interest rate environment should boost volatility, benefitting exchanges," explains Goldman's Jackie Cheung, suggesting HSBC, Aeghon and AXA are best-placed.

There will be a number of further regulatory changes in 2016, including the Solvency II directive, new Federal Reserve rules for banks operating in the US, and European Banking Authority stress tests. Britain's referendum on its inclusion in Europe is getting closer, too, although the exact date has not been set.

But with European rates still at historically low levels, high dividend yields in the insurance sector will act as a key valuation support despite low interest rates, says Cheung. Investors are concerned about what impact dislocated corporate credit markets will have on insurers, adds the broker.

Technology, Media and Telecoms

Consolidation could be the buzzword in the TMT space next year, reckons Goldman, after Global Payments stumped up for Heartland and Canada's Shaw Communications bought Wind Mobile. Although the Aveva/Scheider deal collapsed, Sarah Watson expects high M&A levels to continue.

"Telecoms consolidation, ranging from whether proposed deals in Italy and the UK will be approved, to pan-Euro consolidation, to whether [Vodafone] could resume M&A talks, is a key debate going into 2016, with ramifications for the sector outlook and valuation," explains Watson.

Digital advertising will dominate focus in media, but greater demand for content and telco/media convergence remain key themes.

"The tech discussion tries to identify winners and losers from a lower capex/higher opex world and structural trends such as the shift to cloud, non-cash payments (WalmartPay the latest innovation) and Internet of Things," she adds.

Watson sees strategic value in content providers such as ITV.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.