But pipeline squeezes don’t last long in the shale era; they incentivize midstream companies to accelerate new pipelines or expand existing capacity to fill the gap. which screens for stocks that have shown dividend consistency and then picks the 100 highest-yielding names. It’s heavy in consumer staples stocks, with big tobacco companies among top holdings. The massive growth in liquidity created by global central banks after the financial crisis has stalled in 2018, and will likely shrink in 2019. Meanwhile, valuation spreads between expensive and cheap stocks, measured by relative price-to-earnings ratios, are at extremely wide levels vs. history.
In the past 20 years, these especially wide valuation spreads typically led to a narrowing of the gap and subsequent outperformance of cheap stocks. For many growth stocks, earnings and cash flow are promised far into the future, which makes them the most sensitive to interest-rate fluctuations. In contrast, companies that generate surplus cash flow today, and return much of that to shareholders, offer immediate returns.
European oil majors have reduced their capital expenditures to about 37% below their peak in the period. Global oil majors continue to slash costs and generate free cash flow (that’s cash not needed in operations). Several of these European majors have published long-term carbon emissions reduction goals, with some committing to reductions of 50% or more by 2050. Despite an upturn in crude oil prices last year, 2019’s runaway bull market trampled global integrated oil majors. Energy makes up less than 6% of the MSCI All Country World Index and returned only 14% last year versus 27% for the Index. Even this month’s U. S. airstrike in Iraq and subsequent Iranian retaliation hasn’t attracted much buying interest in energy stocks.
With liquidity ebbing, a bird in the hand will be worth two in the bush. The most undervalued stocks in many markets globally discount recession and structural disruption. Banks, maligned in a period of falling interest rates, trade at near-crisis levels, especially European ones. Global auto stocks trade at meager valuations versus history and compared with other cyclical segments of the markets, such as capital goods. Energy stocks are also trading at historically depressed levels.
At current spot prices, the world’s oil and gas industry doesn’t generate enough cash flow to sustain the spending required to expand capacity. In U. S. shale, production volumes per well decline particularly rapidly without additional investment. Utility stocks around the world have generally trailed their respective equity market performance over the past year. But just look a few years ahead, and the prospects for electric utilities may be considerably brighter than they are today. Investors, apparently unwilling to wait, have cast aside oil services stocks, especially those with sizable exposure to the Permian Basin.
The past decade of massive global monetary accommodation has produced side effects such as asset inflation, fiscal deficits and rising levels of private and public sector debt. The excess liquidity effect in public equity markets has encouraged investors to care less about valuation—and more about growth. Rather than chase market winners—especially those in traditionally defensive sectors such as utilities and consumer staples—investors can find cheaper havens elsewhere.
The MSCI World Integrated Oil & Gas Index trades below its 10-year low in price-to-cash flow multiples, with several constituents offering gross yields well above five per cent. But the oil dominant, particularly the Europeans, will probably experience enough upstream manufacturing in 2020 to speed up their revenue growth. In order to help contain the coronavirus, most commercial flights are usually grounded. Countries that take into account more than 98% associated with global passenger revenues possess imposed travel restrictions. IATA, an airline industry organization, recently forecast passenger visitors down 38% this 12 months (this compares using the most severe drop on record associated with -3. 5% in 2009) and a 44% decrease in passenger revenue. Each additional week of lockdown worsens this aero-mageddon. Regardless of the recent groundings, investors might do well to appear ahead.
The unpopular global telecommunication stocks may have the right characteristics. Revenue growth for the telco industry should accelerate in the next few years as customers consume more data at an increased pace. A wider usage of additional devices—such as smart watches and a second mobile phone for work—is also driving up data usage and subscriber growth. It holds stocks such as Exxon Mobil, Chevron and BP, and has a little more than 20% of the fund in Europe. Managements have grown to be disciplined in spending on expansion and in assiduous cost control.