A surge in energy stocks poses a challenge for climate-conscious money managers who beat the market for years when the sector struggled but are now missing out on Wall Street’s hottest trade.
The S&P 500 energy sector has rebounded 54% this year, outperforming the broad index by 21% and leading the second-best performing group by around 16 percentage points. According to Dow Jones Market Data, this would be the third largest gap between the two leading sectors since 2000.
Big gains on stocks in companies like Devon Energy Corp.
and EOG resources Inc.
are now getting some investors in a tight spot. Many curtailed their positions in the energy sector after the group lagged the S&P 500 in eight out of nine years by 2020, hurt by low oil and gas prices and rising global supplies.
For much of that period, traders were rewarded for favoring green energy companies that had more attractive long-term prospects. Calls to large investors to dispose of fossil fuel producers are getting bigger and bigger.
But now those who avoided the sector also avoided last month’s 19% increase. The S&P 500 is up about 3% over this period. Investors who for years could easily avoid companies like Exxon Mobil Corp.
or chevron Corp.
must decide whether the possibility of rosy returns outweighs their climate considerations.
“It’s a test of your conviction,” said Lee Baker, president of Apex Financial Services. “It’s hard not to ride the wave when you see an opportunity.”
Mr Baker recommended that his clients buy shares in energy companies such as Exxon and Chevron when stocks fell into craters at the start of the coronavirus pandemic. He now advises them to hold her and bet they could climb even higher. Some of its customers still prefer to limit their investments in energy for climate reasons.
In a monthly survey by Bank of America Corp. The percentage of fund managers holding a larger position in energy stocks than the benchmarks they track recently hit its highest level since 2012.
Investors might have a few alternatives. Citigroup Inc. analysts recently put together a basket of global stocks that correlate with the energy sector but have better environmental, social, and governance or ESG scores. European banks played a prominent role in this group, likely because energy prices tend to rise along with government bond yields as the economy expands. Rising bond yields increase the profitability of lending for banks.
Such deals are in focus because US crude oil prices rose to their highest level in seven years at $ 84 a barrel. Natural gas has roughly doubled as a fuel this year, trading over $ 5 per million British thermal units.
The rapid price hikes threaten the global economy in winter when the demand of consumers who heat their homes increases. Rising energy bills and fuel costs at the pump are contributing to investor concern about inflation and possible interest rate hikes. Meanwhile, power shortages are closing factories in parts of Asia and Europe, exacerbating supply chain disruptions around the world.
Energy producers and refineries around the world are struggling to meet demand after reducing investments in new fossil fuels. An Exxon facility in the UK
PHOTO: Luke MacGregor / Bloomberg News
The economic waves put pressure on policymakers leading to a global climate summit in Glasgow, Scotland, starting October 31st – helping to drive prices up.
Investors will also be watching the latest Exxon and Chevron earnings results this week to gauge whether the energy companies will ramp up production. Some analysts believe energy companies will drive much of the equity market’s earnings growth if oil and gas prices remain elevated.
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Deciding whether to invest more money in these stocks than in the market benchmarks is also difficult, with the S&P 500 energy companies making up only about 3% of the broad index. They made up more than 15% of the S&P 500 in 2008 before raw materials collapsed and technology became the world’s dominant industry.
The sector’s low impact means investors who put money in near-market funds like the $ 400 billion SPDR S&P 500 ETF Trust haven’t gotten much of a boost.
Many analysts are suspicious of greenwashing, the practice of energy companies and investment firms to make their operations appear more environmentally friendly than they really are.
Phil Orlando, chief equity markets strategist at asset manager Federated Hermes, said the company has favored the energy sector for the past few months but has continued to keep it as a small part of the portfolio and prioritize ESG factors. He said the company is trying to work with management teams from energy companies and favoring those working to limit climate damage.
“You have to try to find that tricky middle ground,” he said. “You can earn money here and at the same time be ESG-compliant and aware.”
Traders watch energy stocks in particular because they are the primary way for many investors to bet on oil and gas. Anyone who trades in commodity futures contracts or invests in bonds to energy producers must, however, also decide how strongly climate factors influence their position in the fossil fuel sector.
Amanda Agati, chief investment officer at PNC Financial Services Group Inc., said concerns about the sector’s climatic impact factor into her decisions differently depending on the investment strategy she is working on.
Your company continues to hold a smaller allocation of energy stocks than the S&P 500, and is betting that higher supply from the Petroleum Exporting Countries Organization and other producers will eventually moderate the rally while renewables gain momentum.
“It’s definitely one of those crossing moments for the industry,” she said.
Where climate and money meet
Write to Amrith Ramkumar at email@example.com
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