Banks' valuations now appealing, worst of crude oil drop past, Credit Suisse says

Markets are interpreting the drop in the price of crude oil as the result of falling demand, but they were mistaken, a top-ranked strategist said.

How markets were interpreting the facts could be gleaned from the tight correlation between inflation expectations, the performance in cyclical stocks versus defensives and high-yield credit spreads for non-energy companies versus oil futures.

However, in the opinion of Credit Suisse's head of global strategy, Andrew Garthwaite, it was mainly a supply-shock, he said in a research note sent to clients on Thursday.

Furthermore, Garthwaite estimated that even under a worst-case scenario for the oil price, that would only lop off another 0.4 percentage points from US economic growth in 2016, after an approximately one percentage point drag in 2015.

As well, a bottom was now in place in the oil market, he believed, pointing out that on average bear markets tended to result in a 77% drop, which would equate to about $34 per barrel.

Nevertheless, he was worried that on a two-to-three year view oil might not rise past $45-$50 given Saudi Arabia's stated aim to drown out US shale production and the fact that the Middle Eastern Kingdom could in fact cope with "low oil prices for longer".

How to play a bounce in the price of crude oil?

Garthwaite's recommendations to clients were to continue 'underweightng' integrated oil companies, cautioning that further reductions in capital expenditures could threaten their 'economic value' "with the fall in capex-to-depreciation suggesting a reserve replacement ratio of big cap oil below 100%".

Compounding matters for the IOCs, income funds appeared to still be 'overweight'.

Banks' valuations on the other hand - which had the closest correlation to oil outside of commodities - now "looked appealing", he said.

Global emergung market equities were another option for playing a bounce in oil. Russia had largely adjusted to oil at $35 per barrel and earnings and PMI momentum relative to developed economies were improving, the strategist said.

To take note of, Renault had one of the highest positive correlations to the price of oil (outside of energy) while Axa, RyanAir and NN Group had the most negative ones.