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Crumbling Earnings Support on the Oslo Stock Exchange

29.02.2016

Powered by a moderate upturn in share prices and steeply declining earnings estimates forward P/E on the Oslo Børs is rapidly approaching the highest level in fifteen years. How worried should we be?

The main problem right now in the Norwegian stock market is weak and declining earnings. Estimated earnings on the OSEBX index for the next twelve months is down nearly 30 percent since last year's peak. The Norwegian business sector is experiencing a severe earnings recession.

We see little help from company earnings in the short term. The risks primarily lie in the downside in the estimates for as long as the oil price remains below $ 45.

It is hard to say how the oil market will develop in the future, but the signals are not encouraging. In a recent speech the Saudi Arabian oil minister warned that the Kingdom can live with a price of twenty dollars per barrel.

Moreover, he ruled out production cuts for two reasons. Firstly - the lack of trust between the leading petroleum exporters. Secondly, he believed that a cut would only be a gift to high cost producers and not represent a lasting solution.

In light of this, we expect a volatile but sideways trend in oil prices in the coming months.

Hardly the start of something bigger

As long as oil prices do not climb over 45, we doubt that the last couple of weeks’ rally on the Oslo Stock exchange is the start of something bigger. The reason is that earnings support simply is too bad.

Oslo Børs is now trading at 13.9 times next twelve months earnings. We doubt that there is room for more multiple expansion.

That's not to say that stock prices will fall. Two factors indicate a continuing high P/E. One is that earnings are below normal and will increase in the long term. The second is that interest rates on safe investments are extremely unattractive.

If one holds money in the bank or government bonds, one is guaranteed to lose after inflation. In such a climate, investors will easily flock to stocks, real estate and other real assets with permanently inflated prices as a result.

Europe and the US

In Europe and the United States share prices have also come down significantly. However, P/E levels have still not fallen to levels that can be called indisputably cheap.

This in addition to a profit picture that is decaying, means that we do not have any big expectations for the coming months. Our bet is that 2016 will be a flat year on Wall Street and European stock exchanges, until uptrend resumes in 2017.

The downside seems bigger than the upside on the Oslo Stock Exchange during the first half of the year, but a gradual tightening of the oil market can provide a tailwind in the second half and in 2017.

Recession-proof company

This week we put Europris into the Dovre portfolio. With a 2016-P/E of 16 it is not a cheap stock. However, we like that the company delivers robust profit growth and that analysts constantly raise their  estimates. This year the earnings is projected to grow by a respectable 30 percent.

The share also has attractive countercyclical qualities. We can mention that the sales growth has been particularly strong in Rogaland recently, which is probably due more price-conscious consumers in that recession hit part of Norway.

Dovre-portfolio:

  • Kongsberg Automotive
  • Storebrand
  • Marine Harvest
  • Yara
  • Nordic Semiconductor

Europris

In: Europris

Out: American Shipping Company