The Energy Sector. According to Raymond James, “The Energy Sector remains the best performer in 2021, up 35% (10% greater than the next best sector) while the clean tech index is down 47% from its peak in February.” (Raymond James Energy Daily Update May 14, 2021). Last fall, Fidelity Investments suggested that the Energy sector could be the leader in a recovering economy, and they continue to see Energy as a leading sector. What is interesting is that this in the face of all the negative news on fossil fuels and the focus on clean energy. Why is this group up 35% despite the unfavorable sentiment? Add to that the fact that the momentum in green energy can only accelerate. To answer that, it is important to take note of few facts about today.
The energy sector remains the best performer in 2021, up 35%, while the clean tech index is down 47% from its peak in February.
Some investors might think this recent strong and leading performance is the proverbial head fake — that energy stocks (which were the worst performers for the past five years) might again lag the market before long. In the meantime, consider the following data:
During this year’s Berkshire Hathaway annual meeting, Warren Buffet noted that there are over 290 million cars and light trucks on the road in the USA today. Add to that, Statista.com estimates worldwide daily consumption in 2021 will be 96.5 million barrels of oil. They project that to be 103.2 million by 2025. Car sales are projected to hit 18.5 million units this year (Seasonally Adjusted Annualized Rate, SAAR, for April) per Automotive News and Motor Intelligence. This adds up to a lot of demand. The consumption of natural gas and liquified natural gas continues to grow as well. Natural gas is seen as not only a transitional natural resource, but a replacement for coal.
Most notable however is the significant decrease in exploration and production. Both Raymond James and Fidelity have spoken to that recently. Major oil companies (Exploration and Production or E & Ps) are not expanding their investments in new wells even though the price (currently around $65 a barrel) is well above their costs. Most analysts see $50 to be the average cost for these majors and some of the biggest oil companies have lift costs below that, in the low 40s.
Lower exploration and production mean less oil and gas in the future. Fidelity has pointed out that this could significantly decrease what has been an all-out glut of oil and gas over the past several years. While we do not think this means shortages, we do agree this could lead to the firming of oil prices. Historically, this boom-and-bust sector has had large swings in price.
The result of firming oil prices means consistency of profit margins, resilience of dividends and increased share buy backs, all of which could support the continued growth in share prices. It also means that the majors, and smaller firms, through consistent margins, have the capital to expand in to greener and cleaner energy like solar and wind farms. That too could support share prices.
There is a flip side to this however: many institutional investors (pension funds, endowments, mutual funds, insurance companies and others) are shying away from these stocks because they, like many other institutional investors are focused on ESG investing (Environmental, Social and Governance) and hence that could slow or stunt the growth in share prices of many traditional energy firms. It takes that momentum of dollars to keep these equities growing at such rates. Do these investors have it right?
The takeaway is that investors who are looking for value, inflation resilience and income, and have confidence in what is happening in this sector, should possibly consider increasing their holdings or weightings into Energy, if this is right for you.
A note regarding Electric Vehicles: Raymond James (Energy Daily Update May 14, 2021) sees the growth coming much faster for heavy duty electric trucks, commercial vehicles and buses compared with electric cars. Investors can participate in those directly through the stocks in the firms that develop and produce all of these.
Inflation Resistent or Inflation Resilient Investments: The main measures of price inflation came out this past week. First were consumer prices (CPI) which showed an increase of 4.2% year over year and up .8% from March. That was the fastest pace since 2008. The second was producer prices (PPI). That showed a year over year increase of 6.2% or .6% from March. The Bureau of Labor Statistics noted that was the largest increase since 2010. While the Federal Reserve has two major focuses (one being inflation and the other being employment) it is most concerned for the moment about jobs. Interestingly the number of open jobs right now is 8.1mm, and the number of unemployed Americans is approximately 9.8 million.
Wage pressures may or may not be in our future. On the lower spectrum of wages, McDonald’s reported that it is increasing the minimum wage to $14 per hour at its company owned stores. It intends to move that to $15 by 2024. Chipotle also announced that it is increasing its minimum wage to $15 per hour.
The final takeaway, if investors wish to adjust their strategy during periods of price inflation, might possibly turn to increase their weightings in equities (value stocks in particular) as well as commodities (materials stocks) and Treasury Inflation Protected Securities. Energy stocks as well as financials, real estate (mainly REITS), materials and industrials represent more value-oriented stocks or equities.
Knowing what impact inflation and other factors may have and when that might happen means doing your research or utilizing the advice or professional management of an investment advisor.
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Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Investors should consult their investment professional prior to making an investment decision.
Treasury Inflation Protection Securities, or TIPS, adjust the invested principal base by the CPI-U at a semiannual rate. Rate of inflation is based on the CPI-U, which has a three-month lag.
Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations.