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13 August 2018

Turkey:When risks collide

US sanctions on Turkey overlay political risk on economic fragility

Turkey has long been the beneficiary of substantial US dollar funding. However the Erdogan administration is now on the receiving end of US sanctions, having failed to agree to the release of a US pastor held under house arrest in Turkey. A 28% fall in the Turkish Lira last week has highlighted the risks to a corporate sector highly reliant on dollar borrowing. In addition, solutions now appear down to geopolitics rather than domestic economic policy. Given the already entrenched positions of both the US and Turkey, resolution in the short-term appears unlikely in our view. For investors not exposed to Turkey, the lessons are twofold. First, economic fundamentals do now “matter” as the era of cheap and plentiful US dollars draws to close. Second, the rise of populism on both sides of the Atlantic continues to translate elevated political risk into actual investment outcomes.

Elaine Reynolds
1 August 2018

Mexico: reassurance or uncertainty?

Italian major Eni received approval this week for a $7.49bn development of the Amoca, Mizton and Tecoalli fields offshore Mexico, and the first such approval since the election of the new administration under President -elect Andres Manuel Lopez Obrador (Amlo).  Last week, Amlo unveiled his plans to boost the country’s energy sector, with $4bn set aside for state operator Pemex to drill new wells in 2019, and with the goal of increasing production by 600,000bbl/d over the next two years. Also included are plans to build a new refinery and rehabilitate six existing refineries, but no reference was made to the fate of future bid rounds, which he pledged during campaigning to pause and review.

23 July 2018

Earnings estimates: Marginal declines could point to trouble ahead

Regions outside US now showing modest downgrades

Outside the US, most equity sectors have suffered modest downward revisions to 2018 earnings forecasts over the past four weeks. Within the US, 2018 earnings forecasts are effectively unchanged over the same period. It is too early in our view to be certain that this loss of momentum in non-US estimates is the start of a downtrend but it is consistent with the recent sharp declines in industrial commodities. The good news for 2018 – such as US tax cuts and continuing Eurozone expansion was always in our view a H1 phenomenon. The more challenging narratives such as rising US interest rates were in contrast likely to endure for longer. Furthermore, trade war uncertainty has reached a new peak.

Elaine Reynolds
26 June 2018

Drilling success remains elusive in Suriname

Kosmos Energy’s Anapai-1 is being plugged and abandoned after failing to find hydrocarbons in the latest well to be drilled offshore Suriname. The well is the latest in a number of recent attempts to prove an extension of the Cretaceous fan play that has been so successful for ExxonMobil in neighbouring Guyana (The company has just announced its eighth discovery, Longtail, in its prolific Stabroek block).

20 June 2018 · 3 min read

Earnings revisions: No sign of a trade war (yet)

US estimates rising again while Europe and UK remain stable

In our view developed market equities remain in a benign de-rating phase, moving only sideways as profits rise and unconventional monetary policy is withdrawn. Critical to this view is a robust set of profits growth figures for 2018. Despite a significant slowing of economic momentum in the UK and Europe, consensus forecasts there still call for 8-9% 2018 earnings growth on a median basis. In the US, profits forecasts have seen another leg higher in recent months. The median US company is now expected to deliver close to 20% earnings growth in 2018. While there remain legitimate concerns and “headline risk” in respect of US trade policy, in our view and for the near-term, investors seem unlikely to dash for the exits with profits growth this strong.

12 June 2018 · 5 min read

Guaranteed security? Investment implications of US foreign policy

North Korea summit opens the way to an easing of sanctions and international recognition – while G7 allies are left reeling

North Korea has recently made enormous progress towards re-integration with the world economy on its own terms, and in particular security guarantees for its incumbent administration. Development of nuclear missile capability in 2017, followed by the willingness to discuss the destruction of this same capability only a year later does indeed highlight that Kim Jong-un may be, in Trump’s words, a very worthy and smart negotiator. Potentially, the prize is as large as a return to the world community of nations. The contrast with the disarray at the meeting of the traditional G7 allies days earlier was striking - and these trade disagreements are the greater risk for markets in our view.

7 June 2018 · 5 min read

Global implications of rising US yields

Tighter monetary policy and larger US fiscal deficits point to higher yields ahead – and a higher risk premium for emerging markets

Events in Italy may have highlighted a crowded short position in long-term bonds, with US 10y yields falling by 0.25% to 2.75% during a week of political uncertainty. However, US bond market investors still have to contend with rising short-term interest rates and a substantial increase in the issuance of US Treasuries to finance Trump’s tax reform. Furthermore, this is happening at the same time as the US Fed attempts to reduce the size of its balance sheet. Current 10y yields appear too low in the context of a continued economic expansion and emerging market policymakers are becoming concerned.

Elaine Reynolds
6 June 2018

Major resource upgrade for Europa in the Porcupine Basin

Europa Oil & Gas has almost doubled its prospective resource estimate in its FEL 3/13 licence in the Porcupine Basin offshore Ireland. The completion of pre-stack depth migration (PSDM) reprocessing of 3D seismic data originally acquired in 2013 has led to an estimated combined gross mean un-risked prospective resources on the licence of 2.9 bnboe, up from the 2016 estimate of just under 1.5 bnboe. The increased understanding of the Beckett, Shaw and Wilde prospects will provide a fuller picture to potential partners that Europa will be hoping to attract when it launches a farm out process for FEL 3/13 after providing similar updates on its other Porcupine licences, FEL 2/13 and FEL 1/17.

29 May 2018 · 3 min read

Long hot Italian summer

Likely September elections may be a referendum on euro and EU membership

Italy’s failure over the weekend to form a government was driven by the refusal of the Italian President Mattarella to appoint the hardline Eurosceptic Paolo Savona to the position of economy minister. From the perspective of President Mattarella the recent election was not a referendum on the euro; for the Five Star/League coalition his refusal to accept Savona was interference in the democratic process. An incoming caretaker government is being put in place but is not the issue; elections later in the year will in effect be the referendum on the euro. For investors, this creates significant uncertainty over the summer months and into the autumn.

25 May 2018 · 4 min read

Energy drives estimates higher – but oil now under pressure

Risks rising as Russia and OPEC debate turning the taps back on in H2

While it may seem that global investor sentiment has broadly improved over the last 3 months, following the rapid recovery in equity markets, returns have been dominated by the energy sector, Exhibit 1. With Russia and Saudi Arabia now discussing production increases to head off a loss in market share to US shale, this momentum in the oil price may now ease. Separately, despite volatility in emerging markets we note that profits forecasts have been largely stable in 2018, suggesting that any underperformance is due to the rising dollar rather than weakening profits trends. In developed markets, the median 2018 earnings estimate in the US continued to rise over the last month while in Europe and the UK estimates are stable, despite a marked slowdown in the economic data.