Why energy stocks could be the hottest trade

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“Not all market corrections are the same,” State Street’s Olivia Engel said in the company’s latest global stock update.

“Defensive stocks aren’t the only ones that can outperform the market in a correction.”

According to the Senior Director of State Street Global Advisors 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 declines of more than 10%, some typically defensive segments tend to perform better than the market as a whole, and other typically cyclical segments tend to do worse,” Ms. Engel said.

“Performance in the materials and energy sectors tends to be mixed and, in the case of energy, highly variable. But in the pullback triggered by Russia’s recent invasion of Ukraine, materials and energy were the best performing sectors,” she said.

So far this year, the energy sector has outperformed the rest of the market by more than 15%, following its meteoric run following the collapse of the TMT bubble in 2000 and 2001, when it recorded solid gains.

“Energy stocks have become more attractive from both a risk and return perspective.

“We have seen the expected return of energy stocks increase and have also seen their average beta drop. This means that adding energy stocks to a portfolio improves the overall risk and return characteristics of that portfolio,” explained Ms. Engel.

State Street’s estimates of energy stock returns began to improve in the second half of 2021, which translated into improved measures of quality and sentiment. These themes, Ms. Engel said, continued into 2022, and they persisted throughout the pullback that took shape earlier this year. But since the beginning of the Russian-Ukrainian war, these tendencies have accelerated further.

Tech stocks, however, have taken the opposite path of risk and reward.

“Expected returns have fallen and risk measured by beta has increased, particularly in the software industry.

“Tech stocks remained very expensive in our view, and sentiment measures which decreased sharply in 2021 have continued on the same trajectory during recent market events.

Looking ahead, Ms Engel said the conventional wisdom that defensive segments constantly outperform and cyclical segments constantly falter during pullbacks “is not correct.”

“Even during a deep decline, it’s important to remember that some trends are powerful enough to persist, even in extreme market conditions.”

Why energy stocks could be the hottest trade

The latest market correction provided an opportunity to benefit from high-risk segments like energy, an expert said.

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Last update: March 24, 2022

Posted: March 24, 2022

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja’s career in journalism spans more than a decade in finance, business and politics. Now a writer and journalist with experience in all elements of the financial services industry, before joining Momentum Media, Maja reported for several established media outlets in South East Europe, examining key processes in post-conflict societies.

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