The macroeconomic consequences of a crisis today

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1 arch 9, 212 No. 35 Sophe Chardon, Evarse Lefeuvre, Solène Oberg Wha s he deal eques porfolo for hedgng agans a connued ncrease n ol prce? any nvesors are concerned abou he rapd ncrease n ol prces observed snce he begnnng of hs year. Alhough we do no beleve ha he curren prce level can drag down he rally, we canno however gnore he possbly oday of a supply crss caused by geopolcal reasons. In a prevous sudy1, we examned he global consequences of a supply-sde shock on fnancal markes. In hs paper, we shall deepen he analyss by focusng on he US equy secors and he emergng sock markes. In secoral erms, we shall hghlgh he capacy of negraed ol companes and companes lnked o ol and gas producon and exploraon, o procure hedges agans he possbly of such a crss. From a geographcal vewpon, we prefer he Russan eques ndex. The macroeconomc consequences of a crss oday Commodes, he archeypal hgh bea asses, fully parcpaed n he rally a he begnnng of he year: +9.7% for energy, +12.% for ndusral meals and +1.8% for precous meals (GSCI ndces, oal reurn). Agrculural producs however underperformed (+2.4% YTD), as ceran number of producs such as whea suffered from excessve supply. The Bren herefore lef s radng range ($15-115/bl) snce las Augus and reurned o s Aprl 211 levels. USD & EUR Ol Prce Ths developmen s ofen explaned by he ensons surroundng Iran, bu a cross-asse valuaon model shows ha s prmarly he reflecon of changes n he S&P 5, he dollar and Chnese growh. The char below shows he sx-monh varaon n he Bren prce as a funcon of he foregong varables. Crude ol prces do no reflec, or reflec for barely a handful of dollars, he "Iranan premum". Ths s no necessarly good news, because means ha f he conflc deeroraes, prces could shoo up o $15/b, whch would ceranly resul n a break away from he radonal correlaons. Bren valuaon model B ren USD/b B ren EUR/b Sources : Daasream, NATIXIS LOG(BRENT/BRENT(-26)) UP_BOUND LOW_BOUND RESIDUAL ZERO Source : Naxs See Specal Repor No. 4 "Wha cross-asse arbrages (eques/commodes) n he even of an nensfcaon of he Sra of Hormuz crss?, Parck Arus and Sophe Chardon.

2 Because he mpac of raw maerals (especally ol) on economc acvy s no lnear a characersc observed n 211: afer reachng a ceran hreshold, rsng commodes prces carres he rsk of desroyng demand. Ths n urn affecs nvesor behavor and consequenly, he developmens of oher rsky asses. The orgn of he "ol crss" mus also be aken no accoun. A crss fueled by srong demand s less hreaenng for oher asses (26-28, even f hs perod was also marked by an nadequae progresson of supply) han a supply crss ha occurs n a macroeconomc conex of seady growh. Even hough global growh s less vgorous han n 211, he laes IEA repor s clear: he excess producon capacy was 2.5 mllon bbl/day n January/February 212 versus 3.7 mllon bbl/day n Gven ha Iran produces 3.5 mllon bbl/day and expors 1.5, he rsk s clearly concenraed on supply. Even hough he physcal marke "normally" shows excess producon capacy and pons o a prce of around USD 1 per barrel for Bren, he rsks (Iran bu also Sudan, nerrupons n he Norh Sea, ec.) are plng up. The macroeconomc consequences of expensve ol over a long perod would be: () a drop n ncome for Amercan famles for whom gasolne prce s ndexed on he Bren and no on he WTI whch s less expensve. In fac, a 1-dollar ncrease n crude ol prce would lead o a.2 pon loss of GDP; () an equvalen effec n Europe, srenghened by he relavely low level of he EUR/USD (he Bren barrel prce has currenly exceeded he 85 reached n Aprl 28) ; () a srong rsk on he emergng recovery n a conex of sagflaon, hs rekndlng doubs abou he polcy mx ha wll be enforced n dfferen counres (especally f food produc prces were o follow a smlar rend by conagon). Global mpac of a supply crss on markes: a break away from radonal correlaons Such an oucome would clearly lead o downward rends for rsky asses. In erms of correlaons, we noe he sronger relaonshp beween he commodes marke and he eques marke durng hese las monhs (char), whch has parcularly reduced he dversfcaon poenal of hese asses n our global porfolo (see our publcaon "ul-asse allocaon" of February and arch). A shock on ol prces semmng from supply facors would lead o a break away from hese correlaons, us lke wha happened n md-28 and early Correlaon over 26 weeks beween S&P5 B ren and GSCI Agrculure GSCI P reco us meals GSCI Indusral meals Sources : Bloomberg, NATIXIS Amercan eques: hnk negraed ol companes and companes lnked o ol and gas producon and exploraon. In he US sock marke, he secors lnked o energy, commodes and even ceran ules would be posvely mpaced by a rse n ol prces (ceers parbus). ore precsely, hs ncludes he mnng secor, ol equpmen, servces and dsrbuon, ndusral meals, he gas, waer and mul-ules secor, as well as ol & gas producers (see facoral models n he Annex). Sensves of he US secors o ol prces (Q Q4 211) Ol Equpmen, Servces & Dsrbuon Indusral eals & nng Gas, Waer & ulules Ol & Gas Producers Personal Goods eda Foods & Drug Realers Nonlfe Insurance Lesure Goods Household Goods Suppor Servces Banks Fxed Lne Telecommuncaons Pharmaceucals & Boechnology Auomobles & Pars General Realers General Fnancal Sofware & Compuer Servces A 1% ncrease n he Bren prces has a x% mpac on he annual secor reurn Sources: Daasream, NATIXIS nng Overperformng secors when he prces go up Underperformng secors when he prces go up However, hese resuls mus be pu n perspecve o ake no accoun he recessonary mpac of such an ol shock. Tradonally defensve secors (n purple n he Char below) would make possble o dampen a growh shock. These nclude agrbusness, publc servces (elecrcy), several consumer goods, mass-marke realng, chemcals, healhcare, and also he secor of ol & gas producers (whch covers negraed ol companes as well as companes lnked o ol producon & exploraon). The laer secor shows a srong reslence o macroeconomc shocks and volaly peaks. Wh a marke capalsaon of USD 1,3 bn (of whch USD 411 bn for Exxon obl and USD 217 bn for Chevron), s assocaed wh a ceran fnancal soundness and enoys a shock-absorber and safehaven saus (whch was he case durng he shock) On he oher hand, he secor of ol equpmen, servces and dsrbuon s far more cyclcal and would on average be negavely affeced by a conex of deceleraon n economc growh, wh - as was he case durng he Lbyan crss - a squeezng of refnng margns. N 35 I 2

3 Sensves of he US secors o he G4 counres GDP growh (Q Q4 211) Food Producers Suppor Servces Elecrcy General Realers Fnance 18.5% Secoral breakdown of he Russan RTS Index Telecoms 4.4% Indusres.7% Base aerals 13.7% Indusral Transporaon Chemcals Personal Goods Overperformng secors n phase GDP growh declne Consumer Servces 2.% Household Goods Healh Care Equpmen & Servces Ules 6.% Ol & Gas 54.6% Pharmaceucals & Boechnology Foods & Drug Realers Foresry & Paper Healh Care.2% Sources : Daasream, NATIXIS Ol & Gas Producers Lesure Goods Real Esae Ol Equpmen, Servces & Dsrbuon Nonlfe Insurance Indusral Engneerng Banks Underperformng secors n phase GDP growh declne In addon, he perssence of a hgh ol prce level would be he deal opporuny for Russa o balance s publc accouns and srenghen he counry's economy n general (hgh publc spendng, followng he elecoral cycle). Our economss esmae he break-even prce around $123/b hs year 3. Tralng EPS of he Ol & Gas secor (Russa) and he Bren prce Eleconc & Elecrcal Equpmen General Fnancal Lfe Insurance Technology Hardware & Equpmen oble T/Cm A 1% declne n he GDP growh leads o a x% secor over/under-performance Sources: Daasream, NATIXIS Emergng shares: hnk Russa The volaly peak ha would accompany a possble supplysde shock would be lkely o affec all emergng sock markes (rsk averson effec). Ths s, by he way, he man rsk overhangng he reweghng process we sared a he begnnng of he year n hs asse class 2. Excludng he ol effec, Russa was already one of he favoured counres owng o: 1/ s exposure o commodes; 2/ s curren sgnfcan undervaluaon (1 year forward PER of 5.3 versus 8.1 on average over he pas 1 years). The Russan sock marke s specalsaon n he ol & gas secor s mpressve: he companes n hs secor accoun for close o 55% of he RTS$ ndex and are for he mos par negraed ol companes. In he even of an ol shock, he expeced earnngs n he ndex should hen auomacally ncrease Tralng EPS (1=1/21) Bren - RHS Sources : Daasream, NATIXIS We have hus shown ha secor baskes and geographcal arbrages can o a ceran exen make possble o hedge agans a drasc rse n ol prces. We have also facored no our analyss he negave mpac of such a shock on economc growh. A supply-sde shock would herefore lead o a preference for: 1/ he eques secor of negraed ol and gas companes and busnesses lnked o ol exploraon and producon; 2/ he Russan sock marke, wh more han 5 percen specalzed n he ol & gas secor See "Appee for emergng asses s back: wll las?", S Chardon and S Delbos, Naxs Emergng arkes - February See "Russa: he budge's dependence on ol s he man hrea for he Russan economy.", C. Basan, JC Rodado, onhly, Easern and Cenral Europe arch 212. N 35 I 3

4 Annex Facoral models The sensvy of secors o ol prces and GDP growh are derved from facoral models. ore specfcally, he reurns of US eques secors are explaned, from Q o Q4-211, based on he followng varables: he growh n economc acvy of G4 counres; he nomnal long-erm neres rae (1-year T- Noes yeld), whch conveys economc agens fnancng condons as well as expecaons for nflaon, growh and he fscal defc; he ol prce (Bren barrel); he USD rade-weghed exchange rae,.e. weghed by rade beween he Uned Saes and s man radng parners; he resdual marke facor (CAP marke bea), whch s he overall marke reurn flered of he four precedng macroeconomc facors. Ths s a measure of he reurn whch s no explaned by he fundamenals (a knd of marke psychology). For each secor ndex, he model s wren as follows: R 4 1 F Where: R s he prce reurn (.e. ex-dvdend) of secor a dae s he sensvy of secor o facor wren as F s he flered marke reurn he sensvy of secor o hs las facor (.e. he secor s bea). N 35 I 4

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