Following a series of twists and turns, investors scrounging
for yield are looking at the emerging markets fearing that
Treasury yields at home might run out of steam. In the first six
months of 2013, the U.S. market showed resilience with its steady
recovery vis-à-vis emerging counterparts.
Last week's U.S. macroeconomic data in the form of lower
unemployment numbers, receding weekly jobless claims, and Q2
productivity data painted a positive picture for the U.S.
The growth was also amply supported by the Fed's northward
interest rate policy. However, with the imminent regulatory
monetary tightening, investors are now looking elsewhere.
Now, with President Obama winning the support of key
Republicans for his conflict with Syria, the oil bubble is slowly
building up. Any chance of it bursting near-term seems unlikely
with the Obama administration focusing on pooling international
backup for military measures in Syria over its alleged use of
As a result, much like the global oil and gas market during the
1990 Gulf War, the 1997 Asian crisis, the 1998 Russian economic
crisis, and finally the 2008-2012 global financial crisis, the
sector is set to witness upward oil prices. To add to this,
higher demand from emerging economies adds to the pricing
Persistent supply disruptions due to unstable Middle Eastern
geopolitics have taken a major toll on oil import-dependent
emerging nations like India and Indonesia. The direct fallout of
the Syrian military buildup was the spike in Brent crude prices,
which is hovering around $116 per barrel after a steady rise over
the past three months. In such a scenario, we believe any
military action in Syria by the U.S. will push up crude oil price
to around $125 per barrel in the near term.
3 Emerging Oil Winners
Given the oil market conundrum, our investment horizon now
closely inspects oil-weighted companies and related support plays
with a distinct focus on the emerging economies. Instead of
putting all eggs in the domestic basket, we close in on an
integrated trio of two Chinese majors,
China Petroleum & Chemical Corp.
) alongside the Brazilian behemoth
We suggest investing in China Petroleum & Chemical Corp.,
also known as Sinopec, with a Zacks Rank #2 (Buy). The company is
the second largest crude oil and natural gas producer, and the
largest refiner and marketer of refined petroleum products, in
China. On Aug 25, Sinopec posted better-than-expected earnings
supported by outstanding results in oil and gas exploration on
Our bullishness is perked by its expected rise in refining
margins in the second half of 2013. The stock is going for about
7.8x the estimate for 2013, which is in-line with its peer group
average. The stock should not disappoint investors given the
company's long-term expected earnings growth of 6.93%.
Another stock that investors may look forward to is Chinese
offshore giant CNOOC Ltd., which currently carries a Zacks Rank
#2 (Buy). It is China's dominant producer of offshore crude oil
and natural gas. CNOOC is the only company permitted to conduct
exploration and production activities with international oil and
gas companies off the shores of China.
The company recently reported solid second quarter results on
the back of higher overseas production from its February
acquisition of Canadian energy producer Nexen Inc. alongside
steady performances by the already operational oil and gas
fields. We remain optimistic on CNOOC as its performance reflects
its premium assets portfolio, excellent execution strategy,
unique position as a pure oil play and potential transactions in
the merger and acquisition space.
The stock boasting a solid ROE of 20.8% vis-à-vis only 8.1% of
the peer group average is another big positive. The stock also
has a long-term earnings growth expectation of 6.25%.
Our final pick is the largest Latin American petrochemical
operator Braskem SA which currently holds a Zacks Rank #2 (Buy).
The company is steadily improving backed by higher sales volume,
improving operating performance and rising thermoplastic resin
The petrochemical operator is functioning at almost full
capacity to cater to rising domestic demand for its products.
Braskem is expected to witness earnings growth of 153.69% in 2013
and 117.54% in 2014. Moreover, a price-to-book (P/B) ratio of
just 1.7 suggests that the stock is still undervalued.
BRASKEM SA (BAK): Free Stock Analysis Report
CNOOC LTD ADR (CEO): Free Stock Analysis
CHINA PETRO&CHM (SNP): Free Stock Analysis
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We believe that these emerging market stocks with strong
fundamentals and growth prospects are capable of offering
investors solid returns.