LCG EQUITIES WRAP: Oil bear market hurts BP, Alphabet shares down not out

February 4, 2020

A recovery is starting to take hold. Equities are aiming for a second day of gains after a sharp sell-off last week over fears about the economic damage of the coronavirus. All Asian indices were in the green on Tuesday, including in China, the epicentre of the outbreak where the Shanghai Composite index was up over 1%.

Extra liquidity courtesy of Chinese central bankers, instructions from authorities “not to panic” and perhaps some state-backed institutional buying seems to have done the trick.

They say don’t fight the Fed and markets seem to be keeping the mantra for the People’s Bank of China. Authorities can’t prop up markets indefinitely but traders for now are taking the cue to buy the dip. We are now expecting a volatile recovery from last week’s drubbing across equity markets.

On Monday, Wall Street bounced back supported by better manufacturing figures. On Tuesday a big name in tech will likely be drag on the benchmarks. Receding fears about the coronavirus and BP overshooting profit estimates has turboed a rebound on the FTSE 100.

Alphabet shares set to open around 4% lower after a bigger slowdown in 4Q revenue growth than expected. Some mitigating factors like the release of the new pixel smartphone in the year-ago quarter, a shorter holiday period and currency fluctuations explain away a lot of the slowdown. We are not discouraged by Google’s ad growth. For us, the bigger revelation and impetus to feel positive about the shares came from the first breakout of YouTube revenues vs the total. At $15bn per year, YouTube is still just 14% of the total revenue. Given the trend to video in web use, we think as that YouTube percentage moves up, so does the Alphabet share price.

Shares of BP have gained at the open after reporting falling fourth-quarter profits that bettered analyst estimates. Shell undershooting expectations in its own results might have done BP a favour. The weak oil price means all Big Oil is suffering but on a relative basis BP is holding up well. The detrimental effect of the coronavirus on fuel demand sent oil plunging into a bear market on Monday.

Given that this is the last set of quarterly results from chief Bill Dudley, no big strategic steps have been taken to address the slumping profits. A boosted dividend was a little parting gift to shareholders. Before the next set of results, we’d want to see Bernard Looney make his mark and take some action, perhaps with asset sales or write-offs.

Opening Calls

S&P 500 is set to open 22 points higher at 3270