If you’re the kind of investor who doesn’t think oil’s price will return to its previous lofty levels anytime soon, Goldman Sachs Group Inc. advise that you buy shares of companies with strong balance sheets.
Goldman Sachs has filled a “strong-balance-sheet stock basket” that includes, among others:
- Facebook (FB)
- Linear Technology (LLTC)
- Skyworks Solutions (SWKS)
- Google parent Alphabet (GOOG, GOOGL)
- MasterCard (MA)
“The combination of global growth concerns and low oil prices has historically caused credit spreads to widen. That tends to benefit the shares of stocks with strong balance sheets over those pinched by widening spreads,” Goldman’s analysts told MarketWatch.
“Widening credit spreads indicate that the market perceives a higher risk of default and wants to be paid more compensation to own riskier debt. That means borrowing costs for corporations are rising. It punishes companies with weak balance sheets that usually have a lot of liabilities and a high debt-to-equity ratio,” explained MarketWatch’s Ellie Ismailidou.
Oil price volatility has a strong inverse correlation with the performance of stocks with strong balance sheets, she reported. And as interest rates continue to rise, corporate borrowing costs should also rise, punishing companies with weak balance sheets, according to Goldman analysts.
Meanwhile, oil settled 2 percent lower on Tuesday, extending losses for a second straight day, as the market yielded to technical resistance after running above $40 a barrel and worry that U.S. crude stockpiles were rising despite falling production. Uncertainty over how the Federal Reserve will word its policy statement on Wednesday also fueled jitters in financial markets.
Brent settled down 79 cents at $38.74 a barrel, a 2 percent drop similar to Monday's. U.S. crude finished down 84 cents, or 2.3 percent, at $36.34. In the previous session, it fell 3 percent.
Crude had rallied about 50 percent over the past six weeks after talk that major oil producers planned to freeze output at January levels boosted a market that sank to 12-year lows on a supply glut, Reuters
With Brent futures having bounced back as high as $41 a barrel, the International Energy Agency sees “light at the end of the tunnel,” and Goldman is spotting “green shoots.”
Even so, many analysts warn that, like the failed rally last year, this recovery will sputter once prices go high enough to keep U.S. crude flowing.
“If prices keep going up, U.S. production from shale producers is extremely responsive,” Jamie Webster, vice president of crude markets at IHS Energy, said in a Bloomberg
Television interview. “Falling U.S. production is the key dynamic you need to get supply to equal demand, and that might not actually happen,” meaning prices could fall again.
(Newsmax wire services contributed to this report).
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