Price of Oil: A Stock Trader’s Guide to a World Where Oil Costs $100 or More
“A rise in oil is a major source of inflationary risk at a time of already high global inflation,” said strategists including chief investment officer Vincent Mortier at Amundi, Europe’s largest asset manager. “The risk of stagflation globally is now higher,” they wrote in a note.
While oil has enjoyed a long ascent thanks to a booming economy following the crisis caused by the pandemic, the invasion of Ukraine has triggered a wave of Western sanctions against one of the largest producers of raw materials. in the world, pushing prices even higher. Companies already struggling to maintain margins in the face of soaring costs have seen everything from natural gas to food and aluminum soar.
The crisis sent global markets into a tailspin, causing wild swings, target cuts and allocation shifts. Here’s a guide to the emerging landscape, based on conversations and notes released to clients by fund managers and equity strategists:
Change of fortune
What Bank of America Corp. called a ‘shock’ from rising energy prices has led to a chorus of gloomy predictions about the outlook for European markets. Strategists from BofA to Goldman Sachs Group Inc. lowered their projections for continental benchmarks, citing the impact of the military stalemate and rising costs for the European economy.
This is a remarkable change of fortune for European equities, which started the year with a bang, boosted by optimism that they would extend their post-pandemic rally and outperform their US peers in 2022 as part of a… a global rotation towards so-called cheaper value stocks. Today, the risks associated with the war in Ukraine are fueling an exodus of investors, according to the latest available data on funds flows from EPFR Global.
For investors looking to maintain a foothold in Europe and add value to equities, the UK is being touted as a haven.
“We are exploring opportunities to pivot equity exposures from continental Europe to the FTSE 100 and emerging markets,” Paul O’Connor, multi-asset head at Janus Henderson Investors, said in an email. “We are seeing some exciting opportunities emerging in European credit markets as investor exits push yields and spreads higher.”
Goldman echoed that sentiment, raising its target for Britain’s large-cap benchmark just as it downgraded the eurozone on Friday. “The index has almost no technology exposure and a significant weight in value stocks and financials,” Goldman strategists led by Sharon Bell told clients.
In Asia, Goldman Sachs strategists advocate a rotation to commodity-rich Australia and recommend overweighting the energy sector. Some fund managers like Singapore-based Modular Asset Management expect net-exporting Malaysia to become a key hedge amid rising geopolitical tensions.
It may be a counter-intuitive game, but the rise of oil has also boosted its biggest competitor in energy. Stocks of renewable energy from Europe to China rallied this week as energy supply disruptions from unrest in Ukraine are expected to cement political will to accelerate the transition to clean energy.
Europe’s renewable energy index jumped more than 10% this week, in stark contrast to the wider market, which ended another week in the red. Several U.S. green companies also soared, with Sunrun Inc., the nation’s largest residential solar company, gaining 22% on Thursday, the most since July 2020, and shares of the world’s largest solar module maker, Longi Green rose on Friday amid expectations of an improving outlook for the industry.
“European lawmakers could take steps to reduce the region’s dependence on Russian gas supplies, and we believe that renewables could offer the quickest route to reducing Russia’s gas consumption. ‘electricity industry,” Bloomberg Intelligence analyst Rob Barnett wrote in a report on Thursday.
Raw material stocks
Even if soaring fossil fuel prices accelerate Europe’s eventual transition to climate neutrality, it is traditional commodities stocks that will reap the immediate windfall. JPMorgan Chase & Co.’s recommended stock screen amid the energy crisis includes Exxon Mobil, while Goldman’s Bell touts an overweight position in European energy, saying the sector is “both inexpensive in itself and a good hedge against protracted conflict and other rising energy prices.
Oil and gas is the best performing sector in the S&P 500 index so far this year, with Marathon Oil Corp. among the biggest winners. Similarly in Europe, energy and mining are the best performers of 2022 so far, defying a 7% drop for the Stoxx 600 index.
If there is one commodity powerhouse that stands to lose the recovery, it is Russia, following a wave of sanctions targeting its banks and economy. The country’s benchmark index saw its biggest drop ever on Thursday, after the launch of the attack on Ukraine.
Still, strategists advise investors to hang in there and avoid making hasty decisions.
“We hold equities and bonds in Russia,” says Kevin Thozet, member of Carmignac’s investment committee. “So far, we haven’t sold our positions, we are waiting for this dislocation to normalize a bit, for stabilization before possibly selling,” he said in a telephone interview.
Thozet recommends buying healthcare and consumer staples stocks over consumer discretionary stocks, while JPMorgan strategists led by Dubravko Lakos-Bujas see defense stocks such as Lockheed Martin Corp. and Northrop Grumman Corp. take advantage of the turmoil.
On the other hand, carriers, such as Delta Air Lines Inc. and United Airlines Holdings Inc., will suffer from rising fuel costs, while high-income Russian companies, such as PepsiCo Inc., Philip Morris International Inc., Estee Lauder Cos and McDonald’s Corp. are exposed to escalation, they wrote in a note.