00:00So we have this scenario modeling from Goldman on what Brent's impact could be on Asian earnings.
00:06Talk to us about what you're seeing.
00:08Yeah, so we all take the facts in the Middle East as red, so I won't repeat those.
00:13Really, what we're trying to do is to map that onto the implications for Asian markets
00:17and give investors some tools to navigate a dynamic and rapidly changing situation.
00:23So if we think about it, there really are two channels of impact.
00:26One is fundamentals through earnings, the other is through valuation.
00:29So on the fundamental side, the most obvious change has been the spike in oil prices,
00:33which rallied 10 percent in Brent yesterday.
00:38But our commodity strategists estimate there's about an $18 per barrel risk premium
00:42that's been priced in currently relative to our estimation of what demand supply balances should be.
00:48So rounding that up, we said, look, let's just model a 20 percent increase in prices
00:52and see how that could flow through and affect Asian earnings.
00:55And the short summary is that for each market, there are some sectors that would benefit from higher oil prices,
01:02obviously oil exploration production companies, some sectors where oil doesn't really matter that much
01:06and others where oil would matter a lot because it's an input cost, like airlines and autos and a few
01:11other areas.
01:11So when you do all the work on that for the different markets and different sectors and you propagate that
01:16through,
01:17we reckon that a 20 percent increase in oil, very importantly, that's sustained,
01:22could then lead to this aggregate 2 percent impact on earnings for the full year with a lot of interregional
01:27differentiation.
01:28But I really want to emphasize that so much depends upon the duration of this,
01:33because if this is just sort of a short, sharp spike where it's a, you know, a one month or
01:38six week conflict,
01:40then that's going to subside and the fundamental impact would not be that that great.
01:44So I think really the message for investors is how long this lasts from this fundamental perspective.
01:52Tim, I wanted to take your point to one of the sectors that you're opportunistic on,
01:57which is Asian defence sector.
01:59We're seeing these huge moves.
02:00Granted, there's some catch up at play here when it comes to Korean stocks,
02:04but the likes of Hanwha, Defence, LIG next, adding on 25 percent.
02:10Some of these players obviously have defence contracts with Middle East players as well.
02:14Do you build out your positions at this point?
02:19A quick answer is yes.
02:20I mean, one of the takeaways from the report that we published overnight is that there are a number of
02:25themes that we like longer term
02:26that will be positively affected by the developments that we're discussing.
02:31And an obvious one, of course, is the defence theme.
02:33Now, we've liked this for over three years before it became popular,
02:37but it seems very clear this is a theme, so much sadly perhaps, that has long standing legs globally.
02:45If you look at global defence spending, that has for many decades been around 2, 2.5 percent of global
02:51GDP
02:53for reasons, I think, which are very clear.
02:55Europe is going to 5 percent.
02:56U.S. is raising its budget from a trillion to a trillion and a half.
02:59China is spending a lot.
03:02Japan is leaning into defence spending, Korea, India, et cetera.
03:05It's a theme that really has a multi-year dimension to it,
03:08and we think that the current environment is obviously one that's going to add some fuel to that fire.
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