Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Energy is riding the rotation wave, Sea Ltd raises FY20 outlook
Peter Garnry
Chief Investment Strategist
Summary: The energy sector could be an outperforming sector relative to the global equity market over the coming 12-15 months as mobility activity normalizes and the valuation gap closes which is currently a 49% valuation discount vs the global equity market on 2022 expectations. However, in the long-term we do not see the energy sector as a sector that will deliver the best risk-adjusted returns. We are also looking at the Q3 earnings release from Sea Ltd, the fasting growing e-commerce and gaming company in Southeast Asia, which is seeing revenue doubling from a year ago. However, serious questions are mounting over the business excluding gaming.
The global energy sector has responded aggressively to the news about very effective Covid-19 vaccines from both Pfizer and Moderna, discounting a return to normal energy markets as mobility activity returns to more normal levels in 2021. The global energy sector is up 27% driven by a positive response in crude oil prices and positioning as our recent commodity note talks about.
In a longer and relative perspective to the global equity market the energy sector is still down 60% since the recent relative peak in January 2017. The recent move has closed the relative gap by 17% but there is still long way for energy markets to recover their position in financial markets. The energy sector is only 2.3% of S&P 500 and 5.1% of the global equity market including emerging markets. The move into energy stocks is part of a bigger move in equities from growth and momentum stocks into value and pro-cyclical sectors. The big question is whether this rotation will continue and whether 2021 could become the big comeback year for energy stocks that have suffered from Covid-19 and investors’ souring sentiment on black vs green energy.
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