Goldman Cuts Asia Earnings Forecast Yet Again on Oil Shock

(Bloomberg) -- Another week, another Asia earnings forecast cut at Goldman Sachs Group Inc.

The bank’s strategists led by Timothy Moe have slashed another 2 percentage points from their 2020 regional earnings growth forecast for the MSCI Asia Pacific ex-Japan Index to 4%, well below consensus of 13%, according to a note Tuesday.

“The sharp sell-off in oil prices has led to revision to our earnings estimates again,” the strategists said. “Against the backdrop of the Covid-19 virus global demand shock, our commodity strategists have cut their Brent oil price forecasts by nearly 40% for the rest of the year.”

This latest revision is now the fourth in a matter of weeks, following a 3 percentage point cut last week, another the week before that and one at the start of February, as strategists race to account for a growing list of headwinds to the global economy that have roiled markets across stocks, currencies, bonds and other assets.

Read: Goldman Sachs Now Sees Asia Earnings Even Lower: Taking Stock

Based on the oil price slump, the strategists have lowered their regional energy sector earnings forecast by 45 percentage points to -40% and are shifting to underweight for the industry.

The firm’s refreshed analysis forecasts a “swift negative shock to energy earnings and a delayed positive boost to sectors that are oil consumers (by 3 to 4 quarters)” dependent on the extent of the coronavirus outbreak and associated containment measures, they said. About 5% of earnings in the Asia Pacific ex-Japan index are directly adversely impacted by lower oil prices, 17% positive, and almost 80% neutral or very little impact from crude price swings, the strategists said.

Some refiners, regional airlines and industrials that exhibit low or negative correlations to oil that may benefit if prices stay low:

Source: Goldman Sachs, pricing as of March 6

While there is rebound potential other industries offer better value or recovery potential, with Goldman remaining overweight on tech hardware, Internet and media, and consumer stocks.

Citigroup Inc. is also beginning to sort through the aftermath of Monday’s plunge in crude, with their global equity strategists now forecasting a 10% contraction in global earnings per share this year “more aligned with a 2.0% global GDP outcome and sharp drop in oil prices,” according to a Monday note.

“The risk remains to the downside, with a 15% to 20% EPS contraction potentially likely,” they said.

Yet that’s not necessarily a signal to throw in the towel. The Panic Euphoria index published weekly by Chief U.S. Equity Strategist Tobias Levkovich, which hit euphoria in January, has just slipped back into neutral territory and suggests a “buy, but not quite yet” signal.

“Those brave enough to buy into this market will get positive returns over the medium term, however it also suggests that investors may yet get a more attractive entry point,” the strategists said.

--With assistance from Sofia Horta e Costa.

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Lianting Tu, Margo Towie

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