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Oil below $80? No problem for these stocks

In a world where slumping oil prices and weak economic growth are triggering fears of a deflationary spiral, especially in Europe, investors are picking out firms that stand to benefit from that testing environment. Companies such as UK transport operator National Express, airlines Lufthansa and Air France-KLM and even some large consumer-goods groups like Nestle have all been singled out as beneficiaries of so-called “good deflation”, as fuel and other commodities get cheaper and perk up profits.

Deflation is not a zero-sum game: a widespread trend of falling prices would cast a pall across all sectors and push consumers to delay spending. US Treasury Secretary Jack Lew this week warned that European policymakers needed to do more to avoid a Japan-style “lost decade” of low growth. But for now, with consumer spending in relatively good shape and the prospect of an interest-rate hike in the US buoying recovery hopes, some believe “good” deflation has the edge.

“The consumer is in good shape, the oil price is expected to be a bit lower and the dollar is going to remain strong. There are stocks that will benefit,” said Chris White, head of UK equities at Premier Asset Management. National Express, which operates coach and bus routes everywhere from Coventry to Marrakesh, reported a 15 percent rise in profits before tax in the third quarter and stands to benefit from being able to cut the cost of fuel-price contracts, White said.

National Express also has exposure to North America: it operates student buses in 32 states in the US and four Canadian provinces. The stock currently trades at a price-to-earnings ratio of 11.20, versus rival Stagecoach Group’s 13.49 multiple and 12.32 for FirstGroup.

Oil is not the only commodity to fall this year, with the price of key soft commodities including wheat also down in the year to date. That is seen benefiting companies such as food producers Danone and Nestle, as lower production costs can help boost margins. Lower oil prices mean potentially hefty economic savings in Europe. Reuters research last month showed that the European Union could save up to $80 billion in energy imports if oil prices remain low.

So while a falling oil price is playing havoc with the currencies and economies of oil-exporting countries such as Russia or Nigeria, it also represents “a tax cut for the rest of the world”, said J.P. Morgan Cazenove strategist Emmanuel Cau. A basket of twelve stocks tipped by the bank to benefit strongly from a falling oil price, including airlines as well as car-makers BMW and Daimler, has rebounded in the last month as oil dropped through 80 US dollars per barrel.

“Deflation is a problem for central bankers and indebted governments, but for consumers it is not always the evil is it is made out to be,” said Andrew Parry, head of equities at Hermes Global Investors, who counts French carmaker Renault among his high-conviction holdings.

Others said the low inflation backdrop would favour the telecom and healthcare sectors, since their typically strong dividend yields would beat the deflationary pressures hitting many savers’ returns. Tim Gregory, head of global equities at Psigma Investment Management, backed telecom stocks such as Vodafone and Deutsche Telekom and healthcare stocks such as AstraZeneca, Roche and Novartis. “We would favour sectors that have the capacity to demonstrate sustainable medium to long term growth and have good underlying cash-flows and pay good dividends,” he said.

Sudip Kar-Gupta and Alasdair Pal, "Oil below $80? No problem for these stocks," Business recorder. 2014-11-15.
Keywords: Social sciences , Social issues , Social needs , Social development , Oil prices , Economic issues , Economic growth , Production costs , Falling price , Global investors