We’re now into that fun guessing game where we all collectively wonder whether we’ve seen the bottom. Personally, I’m not convinced and took some more tactical profits on stocks such as Pershing. Looking at my own portfolio’s I’d factored in a proper 35 to 40% rout from recent peaks and I think after the remarkable rally this week, we’re well away from that level. But, hey, what the hell do I know and trying to second guess the bottom is always a fool’s errand.

That said it is fun.

And clearly all the major bank strategy bods are trying to provide some clues. For instance, Graham Secker and the highly respected European equities team at Morgan Stanley seem cautiously optimistic. They think current conditions in Europe “ justify an initial rally from oversold conditions, however, post that move the future trajectory of equity markets will likely depend on the duration of the economic impact, which likely depends on virus spread and related containment policies. As per [the chart below]  the recent trend in European equities look broadly comparable to the sharp corrections in 1987 or 1998; however, it is too soon to rule out that the recent rebound is not just a bear market rally – in both 2002 and 2008 we saw just such rallies that exceeded 20%.

Next up we have SocGen’s US equity team.  As you can see from the second chart below, they reckon that the floor for the S&P 500 will be 1,800 – so we have some way to go yet. I also happen to think that feels instinctively about right – I’d had in the back of my mind around 2000.

Dislocations in the energy sector

I can’t imagine running an oil fund that invests in both equities and commodity futures is much fun at the moment. In truth it can’t actually have been much fun for the last few years as the climate change debate grinds away at the marginal buyer of oil equities, constantly chanting ‘stranded reserves’.

Anyway, Jean Louis Le Mee and Will Smith at Westbeck Capital have been valiantly plugging away and they’re always worth reading for their market take (which does tend to have a slightly bullish overall drift, as you’d reasonably expect). Their most recent report suggests that their fund has avoided the really huge drawdowns, if only because the Westbeck Energy Opportunity fund seems to be fairly bearish on a trading position.

But their big calls are really interesting, especially as they clearly know the energy business.

Their first stand out one is that we could see oil ramp up in price in 2021 to as much as $100 a barrel (yes, you read that right). The arguments are out there – the destruction of supply, capex cutbacks and so on. If that is the case watch out for the stagflation hawks making a re-entry into the debate.

One driver of this higher oil price is the possibility that the US Shale/Unconventional sector is toast.

“We doubt the shale industry will recover from this. We expect an impressive wave of shale bankruptcies. All the banks now want out and ESG mandates are likely to translate into permanent damage to capital access. Private equity is nowhere to be seen. Apollo and Elliott just abandoned the restructuring of EP Energy that was agreed just 10 days ago…”

If this is the case, Trump will face a huge amount of pressure in places like Texas which the Democrats have been eying for some time.

That said, as you’d expect, the fund managers think there’s been plenty of indiscriminate selling which they think has been “simply mindless. A lot of names who are in a strong position to make it to the other side (as a combination of balance sheet, low capex, low decline rates, strong hedge book, ample liquidity etc) are down -75% to -85% YTD (and -95%+ from 2014 peak…). A lot of solid names are essentially priced for bankruptcy.” Despite my long term doubts about the energy space in a warming world, I have to say I agree with this analysis. We really are into proper deep value, Ben Graham territory now. The Westbeck managers point to Canadian names “where the share price falls below $2 typically can’t be traded on margin anymore. This is creating an absolute vortex of retail margin calls. While these names can lose another 20-30%, they can also easily double on any short squeeze.” In their view, a number of sound names are down 75-85% YTD. They mention the following:

  • AkerBP – Norwegian producer
  • MEG Energy Corp – Canadian listing, down (TSE MEG)
  • CPG – Crescent Point Energy Corp
  • WCP – Whirecap Resources