Crude oil prices plunged 30% since last Friday on a collapsed deal by OPEC+. We estimate that lower oil price would boost global GDP growth by 0.1/0.3/0.5pct in the best/base/worst scenarios for oil price. On China, lower oil price would help the economy by reducing costs, but demand shock from COVID-19 persists. As for Hong Kong stock market, while sectors would have different impacts from lower oil, we believe earnings estimates of the HSI would be cut further, and thereby we lower our targets for the HSI & HSCEI.
- Oil prices plunged on failed OPEC+ deal. OPEC+’s failure to reach an output curb deal and Saudi Aramco’s price cut led to a crash in oil prices. Global oil demand is already very fragile due to the COVID-19 outbreak, and we believe oil price may drop further.
- Global economy given modest boost. Crash in oil prices is definitely a negative shock to oil-exporting countries, and generally negative to emerging markets, but would boost the global economy modestly by helping consumer spending and firms' operating costs. For global central banks, we believe they are now mainly focusing on COVID-19 risks while deflationary pressure gives them a fresh reason to cut to fight deflation.
- China: amiable cost environment, but demand shock still prevails. Low oil prices may prove amiable to China’s real economy, by alleviating costs for midstream and downstream corporates and freeing up growth potential for consumption. The demand shock coming from COVID-19, may persist till end-Mar or Apr in China and even longer in other places in the world.
- HSI at risks of more earnings cut. Since the COVID-19 outbreak in China in January, HSI’s 2020E EPS has been revised down by 3.4%. Having considered the impact of oil prices and COVID-19, our estimates of HSI's 2020 EPS is 4.6% lower than consensus in our base case. Keeping our target P/E, we cut our HSI target range in 2020 to 23,280 - 28,050.
- Energy & Utilities: negative to neutral impact. Oil & gas upstream players and oilfield services names will suffer from oil price tumble. Impact on renewables is very limited at current stage, as operators’ project development decision is relatively independent from oil price. City gas distributors will have little impact too, given relatively stable demand and dollar-margin outlook.
- Positive to airlines, auto & certain industrial stocks. The crash of oil price, together with policy support, will help China’s airlines alleviate operating costs in an environment of reduced fare prices and load factors due to COVID-19. Auto sector will benefit as lower oil prices will stimulate first-purchase demand and slightly reduce production costs. In addition, certain industrial and construction machinery stocks would enjoy lower production costs.
