Russia’s invasion of Ukraine has prompted the West to re-think its energy strategy, with Europe and the US furthering their commitments to renewables and China also expanding its sustainable energy production.
Yet, demand for oil is expected to rise, compelling investors’ attention once again, who are now torn between the short-term attractiveness of oil, and clean energy for the future.
Investors should always try to be positioned ahead of shifts in investment cycles, said Alison Savas, director of investments at Antipodes Partners. For example, around 30% of the global portfolios remain exposed to energy transition which encompasses conventional energy, materials, industrials and energy infrastructure.
To help investors better assess the situation and position their portfolios to capture the most value from these shifts, below, five experts discuss their views on where the energy market might go from here.
‘Oil prices look set to go higher’
Peter Sleep, senior portfolio manager at 7IM, said that there were some reasons to be optimistic when considering the oil price, particularly on the supply side.
“Demand for oil is still growing but may fall somewhat if there is a global recession. This seems unlikely because as the US contracts, the emerging markets and particularly China seem set to expand and compensate for any weakness. Energy from wind and solar is gradually increasing but it is still a small part of the energy mix,” he said.
“Supply is more interesting. It takes years to bring on new oil fields or coal mines. Since about 2015 capex in new energy sources has been falling as prices fell. Then they started to fall again during the lockdown and as investors put pressure on oil companies to focus on ESG [environmental, social and governance]. The net result is that new supply is very limited and existing supply is being gradually exhausted. Net, even if there is limited demand, growth prices look set to go higher.”
Source: Jupiter
‘The best approach is complementing traditional and energy-transition companies’
Andrew O’Shea, investment director and head of fund solutions at Pharon Independent Financial Advisers, suggested having an exposure to the traditional companies involved in the oil and gas sector, but was pragmatic enough to suggest investors hedge their bets, complementing them with the Schroder Global Energy Transition fund.
“While this fund does not have a particularly long track record, it has achieved an annualised return of 20.8% compared to the IA Global sector’s return of 7.9%,” he said.
“It invests in 30 to 60 companies involved in new clean energy systems, including renewable energy, energy storage and electric vehicles. It will also selectively offer exposure to the underlying materials and technologies required for the transformation to take place, but excludes companies involved in fossil fuels or nuclear energy.”
‘I prefer to overweight the future and underweight the past’
Andy Merricks, co-manager of the Margetts IDAD Future Wealth Fund, considered 2022 an abnormal year for energy and said he would not invest in the old economy, instead focusing on renewables and other future technologies.
“Last year better returns came from sectors that most people would say have had their best years behind them (oil, gas and tobacco, for example),” he said.
“Time will tell whether this success will be repeated consistently but I prefer to overweight the future and underweight the past in the investment decisions that I make and so will continue to target themes such as cyber security, electric vehicles, renewable energy, healthcare innovation and online life for the fund that I run”.
‘We are bullish in the energy product space, from gasoline to gasoil and to jet fuel.’
Others suggested playing different parts of the energy market altogether, focusing on sub-sectors rather than oil or renewables.
Hakan Kaya, senior portfolio manager at Neuberger Berman, predicted volatility across the board, but said there were pockets of opportunities for those who can stomach the risk.
The area more prone to upside spikes when demand hits will be products, according to the manager, and that’s due to Russia potentially having logistical issues and voluntarily cutting production, China reopening and demanding jet fuel, and significantly less storage facilities in the products space.
“We are bullish in the energy product space from gasoline to gasoil and to jet fuel. The world does not have enough refineries to meet refined product demand, due to underinvestment,” he said.
One exception was natural gas, which emits less CO2 than its competitors like fuel oil and coal.
“Natural gas is a relatively easy commodity to produce and store, in some cases produced as a bi-product and hence difficult to maintain a production discipline. Especially in the US, production was ramped up even above pre-pandemic highs, leaving the inventories abundant. We would like to see scarcity remerge with producer discipline before we jump on the gas trade again.”
On renewables, Kaya was more bearish but remained positive that interventions will make clean energy profitable.
“Renewable projects need help and help is coming, generating demand for a lot more commodities along the way. Government spending will hit distribution infrastructure, electric vehicle engines, and energy storage, metalizing the world while electrifying it,” he said.
‘We allocate to battery storage and nuclear energy’.
Another looking at nicher parts of the market was Daniel Lockyer, senior fund manager in the multi-manager team at Hawksmoor, who invests in battery storage and nuclear investment trusts.
“Batteries are an immature asset class and therefore have high discount rates, typically in excess of 10%. In contrast, solar and wind renewable trusts are on 7-8% rates,” he said.
“They offer a cushion against rising interest rates, while benefiting from higher power prices, but more importantly the volatility of power prices which is increasing.”
The trusts he highlighted were Gresham House Energy Storage and Harmony Energy Income, as well as Geiger Counter.
Performance of funds over 1yr against sector
Source: FE Analytics
“Geiger Counter is not for the faint-hearted but represents a good way of gaining exposure to an area that surely has to be part of the clean base load energy mix once the political concerns subside,” the manager said.