Earn
Why energy stocks are becoming more attractive
The latest market correction has provided an opportunity to benefit from high-risk segments like energy, an expert has said.
Why energy stocks are becoming more attractive
The latest market correction has provided an opportunity to benefit from high-risk segments like energy, an expert has said.
“Not all market corrections are the same,” said State Street’s Olivia Engel in the firm’s latest global equities update.
“Defensive stocks are not the only ones able to outperform the market in a correction.”
According to the senior manager of State Street global advisers (SSGA) and chief investment officer of Active Quotative Equity, the latest market correction has provided an opportunity to benefit from high-risk segments like energy.
“Historically, in drawdowns of more than 10 per cent, certain typically defensive segments tend to perform better than the market overall, and other typically cyclical segments tend to do worse,” Ms Engel said.
“Materials and energy-sector performance tends to be mixed and, in the case of energy, highly variable. But in the drawdown triggered by Russia’s recent invasion of Ukraine, materials and energy have been the strongest-performing sectors,” she pointed out.
So far this year, the energy sector has outperformed the rest of the market by more than 15 per cent, following its stellar run in the aftermath of the TMT bubble collapse in 2000 and 2001 when it posted strong gains.
“Energy stocks have become more attractive from both a risk and return perspective.
“We have seen the expected return on energy stocks increase and have also seen their average beta fall. This means that adding energy stocks to a portfolio improves that portfolio’s overall risk and return attributes,” Ms Engel explained.
SSGA’s estimates of energy stock returns began to improve in the second half of 2021, which were reflected in improved quality and sentiment measures. These themes, Ms Engel said, continued in 2022, and they persisted through the drawdown that took shape earlier this year. But since the Russia-Ukraine war began, these trends have accelerated further.
Technology stocks, however, have travelled the opposite risk and return path.
“Expected returns have dropped, and risk as measured by beta has increased, particularly in the software industry.
“Tech stocks have remained very expensive in our view, and sentiment measures — which declined precipitously over 2021 — have continued on the same trajectory during recent market events.”
Looking forward, Ms Engel said the conventional wisdom that defensive segments consistently outperform and cyclical segments consistently falter during drawdowns “is not correct”.
“Even in the course of a deep drawdown, it’s important to remember that some trends are powerful enough to persist, even through extreme market conditions.”
About the author
About the author
Earn
Top firm says five factors are fuelling the Great Resignation
According to PwC, the Great Resignation is showing no signs of slowing down. ...Read more
Earn
Most voters believe JobSeeker rate should be lifted
Nearly half of Aussies said they would likely vote for a candidate who promised to lift the JobSeeker payment above the poverty line. ...Read more
Earn
Should Australia’s minimum wage be lifted?
With the cost of living being a central focus of this election campaign, both major parties are in disagreement over wage increases. ...Read more
Earn
New research claims over 300,000 Australian households have 'no financial safety net'
New research has been released. ...Read more
Earn
Are property investors pushing prices higher?
The average price for investment properties was found to be nearly $170,000 below the mean national property price. ...Read more
Earn
Almost a quarter of full-time workers are considering leaving their current job
Younger workers are the most likely to be thinking about quitting. ...Read more
Earn
Young people are leading the great resignation
Almost a third of Gen Z and Millennial workers are actively seeking a new role. ...Read more
Earn
Women earn up to 37% less than men in the gig economy
A report commissioned by the Victorian government has examined inequality in the on-demand economy. ...Read more
Wrapping up an eventful 2021
Listen now
What Omicron means for property, and are units right for first-time buyers? What is equity crowdfunding? Are industry super funds tapping into member funds to save their skins?
Listen now
Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now
Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now
Earn
Top firm says five factors are fuelling the Great Resignation
According to PwC, the Great Resignation is showing no signs of slowing down. ...Read more
Earn
Most voters believe JobSeeker rate should be lifted
Nearly half of Aussies said they would likely vote for a candidate who promised to lift the JobSeeker payment above the poverty line. ...Read more
Earn
Should Australia’s minimum wage be lifted?
With the cost of living being a central focus of this election campaign, both major parties are in disagreement over wage increases. ...Read more
Earn
New research claims over 300,000 Australian households have 'no financial safety net'
New research has been released. ...Read more
Earn
Are property investors pushing prices higher?
The average price for investment properties was found to be nearly $170,000 below the mean national property price. ...Read more
Earn
Almost a quarter of full-time workers are considering leaving their current job
Younger workers are the most likely to be thinking about quitting. ...Read more
Earn
Young people are leading the great resignation
Almost a third of Gen Z and Millennial workers are actively seeking a new role. ...Read more
Earn
Women earn up to 37% less than men in the gig economy
A report commissioned by the Victorian government has examined inequality in the on-demand economy. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
