Bullish companies in the sector: Bank of America, BlackRock, Credit Suisse, Deutsche Bank, Federated Hermes, JPMorgan, Morgan Stanley, UBS
Bearish companies in the sector: N / A
Consensus thesis: An oil supercycle, inflation protected yield and cheap valuations will lead to another bumper year.
Remark: It’s the story of two very different years for energy stocks. After a dismal 2020 in which the sector posted an appalling performance (-37.3%), energy made a strong comeback in 2021, as the sector grew by 48.5% and beat the market at large.
The bullish case, in hindsight, was obvious: the global economy rebounded strongly, and oil prices followed suit. West Texas Intermediate crude prices rose 58% to $ 77 a barrel from $ 48, and JPMorgan strategists believe oil “supercycle” where prices are skyrocketing has only just begun.
“We believe that commodities, and in particular energy assets, are in a supercycle driven by the recovery of COVID-19, currency depreciation, geopolitical tensions and supply / demand frictions built over the past few years,” said writes Marko Kolanovic and Hussein Malik, co-managers of JP Morgan. research, in a report detailing their 2022 outlook.
Bank of America’s affinity for energy stocks is based on the inflation-protected returns they offer. Rising inflation is a boon to the energy sector, as rising commodity prices increase the incomes and profits of oil producers. This keeps these companies in good financial health and allows them to pay large dividends to shareholders.
Energy fundamentals may be strong, but their valuations have long been very cheap. JPMorgan strategists noted that the sector only accounts for about 3% of the S&P 500, up from a peak of almost 20%.
The lack of love comes from concerns that a world that moves away from fossil fuels and turns to more environmentally, social, and governance-focused businesses, or ESGs, will hold back energy stocks. But BlackRock strategists ignored those concerns, citing the opportunities ahead.
“Many may have shied away from mainstream energy for fear of its demise in a more ESG-centric world, but ESG issues have helped push the price up in 2021,” BlackRock strategists wrote. “We would focus on areas where there are growth opportunities, such as exploration and production companies, rather than places where growth is limited, such as service providers.”