Share of energy stocks as a percentage of S&P 500’s market cap are now at merely 2.2%.
With two vaccines now claiming to be more than 94% effective the return of normalcy is closer than ever before. Earlier this year investors and analysts had been hunting the ‘new normal’ trade which included internet stocks and others that benefited from the stay-at-home trend amid a pandemic. However, now increasingly the trend is shifting towards the back to normal trade and the hunt for what stocks stand to benefit the most is on. Chris Wood, the global head (equity strategy) at Jefferies, adding to his ‘back to normal’ trade now suggests owning energy stocks.
“The other obvious area to own for those who want to make money in the post-Covid ‘back to normal’ trade is energy stocks,” Chris Wood said. The global market strategist said that the world still depends on fossil fuels for 84% of its energy consumption and that is not going to change quickly. “The history of energy transitions is that they take a long time and, in this case, the transition is being driven more by government policies than by economic logic even allowing for the increased competitiveness of renewables,” Chris Wood added.
Although the push towards renewable energy might be gaining steam, which gives little incentive to oil companies for investing in new explorations, this is likely to reduce the supply of oil while demand remains strong, according to Chris Wood. “GREED & fear continue to believe that demand for oil in 2021 will be much nearer the record 2019 level of 100m barrels/day than currently assumed. The other bullish point for oil is the accumulating evidence, previously discussed here on several occasions, that US shale is largely played out for geological reasons,” he added.
Further, Chris Wood said that the best managed oil companies will now, like the gold miners before them, be focused on free cash flow generation and improving returns to shareholders. Share of energy stocks as a percentage of S&P 500’s market cap are now at merely 2.2%. Which, Chris Wood said gives an opportunity to buy energy stocks at even more distressed prices. “On this point the S&P 500 Energy Sector Index had its best weekly return last week since the index began in 1989, rising by 16%,” he added.
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