As US markets turn, some are sticking with the rare winner of 2022: energy stocks – SABC News

Heartbreaking market volatility and attractive valuations are prompting some investors to hold on to their bullish view on energy stocks, one of the few bets that have thrived in an otherwise trying year.

It’s not an easy call. The S&P 500 energy sector is already up about 46% this year and tighter monetary policy around the world has heightened risks of a global recession that could reduce demand for energy.

Still, signs that supply will remain relatively scarce are prompting some investors to stay in the sector, lured by attractive earnings prospects and valuations that remain relatively low despite strong gains in many energy stocks this year.

The S&P 500 energy sector trades at a price-earnings ratio of 9.9, nearly half the broader index’s valuation of 17.4.

Few see the end of the sell-off in broader markets, too, as lingering inflation bolsters expectations of more market-killing rate hikes from the Federal Reserve and other central banks.

The S&P 500 is down around 24.5% this year, while bonds – as measured by the Vanguard Total Bond Market index fund – are down nearly 18%.

“It’s hard to see people giving up on energy because it’s the best of both worlds,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, referring to the sector’s low valuation and upside potential. additional if supply remains limited. “If you’re worried about the direction of the market, this is a great place to hide.”

Analysts expect energy companies’ earnings per share to grow 121% in the third quarter from the same period a year ago, while those of the broader non-energy index fall 2.6% , according to data from Refinitiv.

Energy is the only S&P 500 sector expected by Credit Suisse analysts to post positive revisions to its third-quarter earnings.

US oil giants Exxon Mobile Corp and Chevron Corp. publish their results on October 28.

Over the coming week, investors will focus on earnings from Tesla Inc., Netflix and Johnson & Johnson, among others.

Expectations of renewed tension in the oil market have been boosted by recent OPEC+ production cuts, as well as plans by the European Union to ditch Russian crude by February.

U.S. production in 2022 is expected to average 11.75 million bpd, down from a previous estimate of 11.79 million bpd, according to the U.S. Department of Energy.

Brent crude prices stood at $91.46 a barrel on Friday, up nearly 10% from a recent low after falling nearly a third between July and September.

“There is an outsized likelihood that crude prices could soar, particularly if demand issues do not materialize to the extent that some bears expect,” wrote the TD Securities analysts, who s expect oil prices to hit $101 in 2023.

UBS Global Wealth Management analysts expect oil to hit $110 by the end of the year.

Some fund managers remain skeptical that energy will continue to outperform if the global economy slows in the face of central bank monetary policy tightening.

“We’re heading into recession all over the world and that’s going to reduce demand,” said Burns McKinney, portfolio manager at NFJ Investment Group, which is increasing its overweight in dividend-paying technology companies such as Texas Instruments and Cisco.

At the same time, the S&P 500 selloff is creating buying opportunities in consumer discretionary and large-cap tech stocks that are more attractive over the long term than energy, said Lamar Villere, portfolio manager at Villere. & Co.

“We’re starting to see opportunities that are harder to miss,” he said.

Others, however, believe the fundamentals remain aligned for the sector and see more upside.

Saira Malik, chief investment officer at Nuveen, believes fund managers will remain lightly positioned in energy stocks despite recent gains. She also bets that the Chinese economy will rebound in the coming months, supporting global oil prices.

“We still think the energy has legs here,” she said.

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