Global Allocation Insight

Energy stocks harboring opportunities
for investors today

Aug 17, 2017

The underperformance of energy stocks even as oil prices have stabilized creates opportunities for investors.

Energy has been the worst performing sector in the United States year-to-date. As shown below, energy stocks have underperformed broader global equities as crude oil prices struggled. While oil has bounced in recent weeks, it is still down roughly 10% year-to-date, along with the broader energy complex. This has left the energy sector unloved, creating opportunity.

Oil prices have stabilized...

Oil prices have stabilized

...but energy stocks remain at depressed levels

Energy stocks remain at depressed levels

Source: Thompson Reuters Datastream, August 2017. Energy stock performance represented by the MSCI World Energy Sector; global stocks represented by the MSCI World Index, both in USD and rebased to 100 as of January 1, 2014.

While a well-supplied market suggests a sharp spike in oil prices is unlikely, we are starting to see energy markets return to balance as bloated inventories slowly start to shrink. Assuming oil remains within its recent range – roughly $45 to $55/barrel – select energy stocks look particularly attractive. In the United States, the S&P GICS Energy Sector is trading at a 43% discount to the broader S&P 500 Index, the largest discount since at least 1995. Energy stocks look even cheaper outside the United States. European integrated oil companies are trading at a particularly steep discount while continuing to offer compelling yields.

The BlackRock Global Allocation Fund holds an overweight in energy, and we used the sector’s recent underperformance as an opportunity to increase exposure to select names. We prefer midstream, refining and exploration & production companies in the United States as well as globally integrated oil companies, notably in Europe.

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Portfolio highlights

  • Underweight in both equity and fixed income. We prefer stocks over bonds, but remain underweight both asset classes relative to the reference benchmark given meaningful gains year-to-date.
  • Increased gold slightly. Gold serves as an important portfolio diversifier given its non-correlation to global stocks. It has historically moved inversely to the U.S. dollar and may help preserve the fund’s purchasing power should the USD decline further.
  • Reduced U.S. dollar exposure. Year-to-date, the U.S. dollar has depreciated against 41 of the world’s 43 most widely traded currencies. Since the beginning of the year, we reduced the fund’s USD exposure from 71% to 60%.

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