The IEA is concerned about the impact of rising energy prices on global economic growth, and both it and OPEC have lowered near-term oil demand growth expectations. The impact of the US-China trade dispute continues to be sized up by a number of industries, including automakers, and big tobacco companies may be looking to the cannabis market for future growth as the space remains sensitive to potentially increasing regulations.
By Kris Rosemann
US stocks bounced back early in the October 12 trading session thanks in part to encouraging earnings reports from the likes of JPMorgan Chase (JPM) and Citigroup (C) and a slight reversal of the yield curve’s recent flattening move. Simulated Best Idea Newsletter portfolio idea Visa (V) gained back some of its recently lost ground thanks in part to volume strength reported at major US banks, which should indicate solid volume performance for the financial tech company. We continue to like the company, which is one of the strongest operators in one of the most attractive industries, as it benefits from the enviable network effect.
The International Energy Agency’s (IEA) monthly report, released October 12, highlighted its opinion that expensive energy is back and could pose a threat to global economic growth, which resulted in it reducing its oil demand growth outlook for 2018 and 2019 by 110k barrels per day to 1.3 million barrels per day and 1.4 million barrels per day, respectively. OPEC also lowered its oil demand growth expectations for 2018 and 2019 as a number of factors, including tightening monetary policy in developed markets, softening emerging markets, and trade and geopolitical uncertainty, weigh on the outlook for overall economic growth. The cartel’s monthly report revealed an increase in OPEC and Russian production in the month of September that was sufficient in making up for lower output from Iran ahead of potentially disruptive US sanctions.
Meanwhile, the International Monetary Fund (IMF) modestly lowered its global economic growth forecasts by 0.2%, to 3.7%, as it seems as though trade tensions involving the US have begun to impact economic activity across the world. The implications of a number of trade arrangements were highlighted by the IMF, including the global auto and auto part supply chains, which have the potential to be disrupted if retaliatory tariffs continue to be enacted. China’s trade surplus with the US widened to a record $31 billion in the month of August as exports to the US continued to rise despite recent tariffs, which may only add fuel to the fire of the trade dispute.
China’s auto market may already be feeling the pain of the ongoing trade conflict, as auto unit sales in the country fell nearly 12% on a year-over-year basis in the month of September according to the China Association of Automobile Manufacturers. The drop marks the largest in the nation since 2011 and is the third consecutive month of declines, though the market is still up 1.5% in the year-to-date period. However, the weakness is noteworthy to automakers and their suppliers as many have invested heavily in the country in recent years in anticipation of consistently-solid growth. Ford (F) reported a 43% year-over-year drop in unit sales in the month of September as it continues its turnaround plan aimed at delivering vehicles designed specifically for the Chinese consumer. Simulated newsletter portfolio idea General Motors (GM) is more sensitive to Chinese auto news as it has a significant presence in the country, too.
The tobacco space remains ultra-sensitive to sentiment surrounding the FDA and its stance on e-cigarettes and potentially changing nicotine standards, the latter of which was the focus of a speech at the FDA Center for Tobacco Products that apparently suggested reduced nicotine standards may be implemented as soon as 2020. Third-party estimates suggest 2024 may be a more likely timeline for such a change, but reducing nicotine levels would ultimately reduce the addictiveness of tobacco products, a move that has the potential to meaningfully impact the pricing power of big tobacco companies should consumers find it easier to walk away from rising prices in the future. Pricing has been the key driver of earnings growth for the space for some time now and the destruction of such a growth lever would likely mean the end of the current investment thesis for the space.
Though the regulatory environment in tobacco has always been challenging, new opportunities have been popping up as well. Simulated newsletter portfolio idea Altria (MO), for example, recently made headlines with its reported interest in a minority stake in Canadian cannabis producer Aphria (APHQF) with the intention of potentially becoming a majority holder in the future. The move may be no surprise as Canada is set to legalize recreational marijuana October 17, which has led to a great increase in investor interest in the space. A more in-depth discussion of the cannabis space can be found here, “Constellation Sets Optimistic Tone, Outlines Cannabis Opportunity.”
Auto Manufacturers: F, GM, HMC, HOG, TM, TSLA
Tobacco: BTI, MO, PM, SWM, VGR
Related: FXI, MCHI, CGC, TLRY, PYX
—–
Valuentum members have access to our 16-page stock reports, Valuentum Buying Index ratings, Dividend Cushion ratios, fair value estimates and ranges, dividend reports and more. Not a member? Subscribe today. The first 14 days are free.
Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.